MASTER 
NEGATIVE 
NO.  95-82360 


COPYRIGHT  STATEMENT 


The  copyright  law  of  the  United  States  (Title  17,  United  States  Code) 
governs  the  making  of  photocopies  or  other  reproductions  of  copyrighted 
materials  including  foreign  works  under  certain  conditions.  In  addition, 
the  United  States  extends  protection  to  foreign  works  by  means  of 
various  International  conventions,  bilateral  agreements,  and 
proclamations. 

Under  certain  conditions  specified  in  the  law,  libraries  and  archives  are 
authorized  to  furnish  a  photocopy  or  other  reproduction.  One  of  these 
specified  conditions  is  that  the  photocopy  or  reproduction  is  not  to  be 
"used  for  any  purpose  other  than  private  study,  scholarship,  or  research." 
If  a  user  makes  a  request  for,  or  later  uses,  a  photocopy  or  reproduction 
for  purposes  In  excess  of  "fair  use,"  that  user  may  be  liable  for  copyright 
infringement. 

The  Columbia  University  Libraries  reserve  the  right  to  refuse  to  accept  a 
copying  order  if.  In  its  judgement,  fulfillment  of  the  order  would  involve 
violation  of  the  copyright  law. 


Author: 


Secrist,  Horace 


Title: 


An  economic  analysis  of 
the  constitutional... 

Place: 

[Madison,  Wis.] 

Date: 

1914 


•t       rtm  -BJ^naxwji  spjf 


MUi         — ^^   ■■- 


.A 


MASTER    NEGATIVE    # 


COLUMBIA  UNIVERSITY  LIBRARIES 
PRESERVATION  DIVISION 

BIBLIOGRAPHIC  MICROFORM  TARGET 


ORIGINAL  MATERIAL  AS  FILMED  -    EXISTING  BIBLIOGRAPHIC  RECORD 


' 330.6 
V/76 
'  V.8 


■D  530,7^ 


Secrist,  Horace,  IBOl-l^'^o, 

...  An  economic  analysis  of  the  constitutional  restric- 
tions upon  public  indebtedness  in  the  United  States,  by 
Horace  Secrist  ...    [Madison,  Wis.]  1914. 


131  p.    tables  (1  fold.)   diagr.    23^".     (Bulletin  of  the  University  of 
Wisconsin,  no.  637.    Economics  and  political  science  series,  v.  8,  no.  1) 

Thesis  (ph.  d.) — University  of  Wisconsin,  1911. 
Bibliography:  p.  127-131. 

^opy-in  Ciocial   Go-ie^^e^-ReadJng  -Hoom. 


!.  Debts,  Public— U.  S.    2.  Municipal  finance— U.  S. 

Another  copy  in  B'-*iness  Library. 


fjbrary  of  Congress 
Univ.  of  Wisconsin  lyibr. 


-'        H31.W63    vol.  8,  no.  1 


14-31274 


RESTRICTIONS  ON  USE: 


TECHNICAL  MICROFORM  DATA 


FILM  SIZE: 


3)'orY\rA 


DATE  FILMED: 


TRACKING  #  : 


REDUCTION  RATIO: 


lix 


IMAGE  PLACEMENT:   lA   (llA)    IB      MB 


l\\'^  \^S 


INITIALS 


:     J> 


/nsH 


ri^312 


FILMED  BY  PRESERVATION  RESOURCES,  BETHLEHEM,  PA, 


> 


^. 


^ 

^T^. 


^ 


^. 


3 
3 


D" 
O  > 

qo.  a 

-.m 

Is 


N5 
CO 

tn 
o 


Ul 

3 
3 


> 

CD 

0,0 

o  m 

OQ 

^  o  o 


X 

< 

N 


X 

M 


a 


*e 


'V- 


=-; 


>* 


'i^: 


>^ 


^^'' 


.'C>. 


«v? 


^. 


^.. 


# 


^c^ 


3 

3 


> 


Ul 

o 

3 

3 


J^^ 


> 
Ul 


^> 


^. 


.".^ 


a? 


%f^ 


O 

o 

3 
3 


O 


ri^i^iiPi^El^i? 


io  1^  III:;  I 


bo 


o 


s  m 


k5 


ro 


1.0  mm 


1.5  mm 


2.0  mm 


ABCDEFGHIJKLMNOPQRSTUVWXYZ 
abcclefghi|klmnopqrstuvwxyzl234567890 


ABCDEFGHIJKLMNOPQRSTUVWXYZ 
abcdefghijklmnopqrstuvwxyzl234567890 


ABCDEFGHIJKLMNOPQRSTUVWXYZ 

abcdefghijklmnopqrstuvwxyz 

1234567890 


\^o 


2.5  mm 


ABCDEFGHIJKLMNOPQRSTUVWXYZ 

abcdefghijklmnopqrstuvwxyz 

1234567890 


V 


i<' 


.^'" 


^ 


cr 


& 


fo 


'f* 


fp 


¥^ 


V 


C? 


c 


^ 


^o 


^o 


:^- 


m 

H 

O 
O 

-o  m  -o 

>  C  cd 
I  13  ^ 
0</)    ; 

m 

£! 

30 
O 


€ 


'S' 


c^ 


-.♦♦"a^ 


* 


^<, 


1-^ 

I\) 

Ul 

0 

- 

3 
3 

IS 

3  r- 

P 
is 

•Or— 


r 


I" 


3  V 


si 


i' 


i?.J<<>. 


^j^^4f 


> 


^ 


Columbia  ©nttoewftp 

mtlieCttpofJlmfork 


LIBRARY 


School  of  Business 


BULLETIN    OF    THE    UNIVERSITY    OF    WISCONSIN 

XO.   637 

Economics  and  Political  Science  Series.  Vol.  a.  No.  i.  pp.  1-132 


\. 


\ 


AN  ECONOMIC  ANALYSIS  OF  THE  CONSTITUTIONAL 

RESTRICTIONS  UPON  PUBLIC  INDEBTEDNESS 

IN  THE  UNITED  STATES 


BY 

HORACE  SECRIST,  Ph.  D. 

Assistant  Professor  of  Economics 

Northwestern  University 

Sometime  Instructor  in  Political  Economy 

The  University  of  Wisconsin 


LIBRARY 
SCHOOL  OF  BUSINESS 


A  THESIS    SUBMITTED  FOE   THE  DEGREE  OF   DOCTOR    OF    PHILOSOPHY 

THE  UNIVERSITY  OF  WISCONSIN 


\ 


APRIL,  1914 


i**i 


1 


J> 


G5  ^ 


s: 


TABLE  OF  CONTENTS 


^■^^■^  ^-  ■oi^^S^'^NO'^IC  ANALYSIS   OF  THE   CONSTlTTTTinNAT 
RESTRICTIONS   UPON  STATE  INDEBTEDNESS 

IntBODUCTION '  PAGE 

Chapteb  1    The  General  Environment  which  Produced  the  Con 

stitutional  Restrictions  upon  State  InSedness  .   f    13 
Chapteb  2    The  Immediate  Causes  of  Constitutional  Restrictions 

t?Mo^*vV^^^'5*^^^^«^'  ^it^  ParticularReferen?! 
to  New  York  and  Pennsylvania .?.   !. ! .  ^f    21 

Chapteb  3    The  Nature  and  Significance  of  Constitutionai  Restric- 

tions  upon   State  Indebtedness ..!T.   !.....     32 

Chapteb  4    The  Use  of  Borrowing  by  the  Modern  State. .....'.' .' ." .' .'    45 

Chapteb  3    A  Criticism  of  the  Policy  of  Restricting  Municipal"  in 

debtedness  by  the  Present  Constitutional  MethSd.         84 

Chapter  4    The  Economic   Problems   in   Municipal   Indebtedness 

and  Suggestions  for  their  Solution. . . . ...?;:.  ."f.ff  io4 

Appendices  I,  II,  III,  IV 

Bibliography   

• 127 


[3] 


m>\ 


PREFACE 


The  recent  change  in  attitude  respecting  the  proper  sphere  of 
the  state,  together  with  the  services  expected  of  and  the  duties 
imposed  upon  our  municipalities  under  modern  economic  condi- 
tions seem  adequate  justification  for  an  economic  analysis  of  the 
limitations  upon  public  indebtedness  in  the  United  States.  It 
has  seemed  wise,  however,  to  confine  such  analysis  to  the  restric- 
tions found  in  the  state  constitutions. 

The  Introduction  contains  a  brief  statement  of  the  argument 
and  main  topics  discussed  and  the  nature  of  treatment. 

The  author  wishes  to  express  his  appreciation  of  the  untiring 
services  and  constant  encouragement  which  he  has  received  from 
his  wife  in  the  preparation  of  this  study. 

Madison,  Wisconsin,  July,  1911. 


[5] 


INTRODUCTION 


This  study  is  divided  into  two  parts :  first,  an  analysis  of  the 
constitutional  restrictions  on  state  debt ;  and  second,  an  analysis 
of  the  constitutional  restrictions  on  local  or  municipal  debt. 

Part  I,  is  both  historical  and  analytical.  The  historical  part  is 
treated  in  the  first  two  chapters.  In  the  first  chapter  a  descrip- 
tion is  given  of  the  general  environment  out  of  which  state  bor- 
rowing took  its  rise.  In  giving  this  description,  attention  is  di- 
rected toward  the  composite  of  forces,  economic,  political,  and 
social,  which  preceded  the  crisis  of  1837.  Mention  is  made  of 
the  insecurity  in  state  and  national  banking,  of  westward  expan- 
sion, of  the  need  for  improved  communication,  of  the  inflation  of 
the  currency,  of  the  rush  for  internal  improvements,  of  the  ex- 
alted position  given  to  the  functions  of  the  state,  of  the  unsettled 
land  policy,  of  the  market  for  American  securities,  etc.  An  ex- 
planation is  also  ventured  as  to  why  internal  improvements  were 
not  left  to  private  capital.  The  chapter  closes  with  a  contem- 
poraneous description  of  the  period  by  Judge  B.  R.  Curtis,  and 
this  is  followed  by  a  brief  summary. 

Part  I,  Chapter  2,  is  also  historical.  It  treats  of  the  imme- 
diate causes  of  the  constitutional  restrictions  in  New  York  and 
Pennsylvania,  and  centers  about  their  financial  policy,  and  the 
steps  leading  to  the  final  settlement  of  the  struggle  for  the  cur- 
tailment of  their  borrowing  powers  by  constitutional  means. 
The  point  of  view  taken  in  this  chapter  is  that  the  extent  of  debt, 
the  aversion  to  direct  taxation  in  any  form,  the  vascillating  atti- 
tude toward  payment  of  debt,  the  crisis  of  1837  and  the  conse- 
quent  loss  of  foreign  and  domestic  markets  in  1839,  together  with 
the  presence  of  the  policy  of  repudiation,  forced  public  opinion 
to  revolt  against  further  state  borrowing.    No  extended  explana- 

•      [7] 


8 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


SECRI ST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


9 


1 1 


tion  is  given  of  the  immediate  causes  for  constitutional  restric- 
tions in  other  states.  The  purpose  in  mind  is  not  primarily  ta 
explain  the  causes  for  restrictions  but  to  analyse  their  effect  from 
the  point  of  view  of  public  finance.  We  are  interested  in  this 
background  only  because  it  is  necessary  to  the  analytical  and  crit- 
ical part  of  the  thesis. 

Part  I,  Chapter  3,  treats  of  the  nature  of  the  constitutional  re- 
strictions on  state  indebtedness.    It  deals  specifically  with  the 
principles  involved  and  with  the  restrictions  themselves,  touching 
such  points  as  the  amounts  that  can  be  borrowed  (a)  for  tem- 
porary purposes,  (b)  for  suppressing  insurrections,  etc.  (c)  for 
additional  purposes  and  the  safeguards  in  the  forms  of  popular 
or  legislative  approval  that  are  set  up,  (d)  of  the  prohibitions 
against  assuming  any  municipal  or  private  debt,  (e)  of  the  pro- 
hibitions against  subsidies  to  private  companies  either  by  direct 
aid  or  by  subscription  to  their  stock,  etc.    These  points  are 
treated  analytically,  explanations  being  given  why  varying  pol- 
icies were  pursued  by  the  different  states.     The  variations  in 
most  of  the  important  states  from  what  can  be  considered  the 
norm  are  also  given  attention.     This  chapter  with  Appendix  I 
cover  the  leading  constitutional  restrictions  for  all  the  states  of 

the  Union. 

Part  I,  Chapter  4,  treats  of  public  borrowing  as  a  financial  de- 
vice of  the  modern  state.  The  point  of  view  maintained  is  that 
public  debt  is  neither  a  blessing  nor  an  evil  per  se  but  only  one 
method  of  securing  control  over  public  funds.  The  thesis  is  sup- 
ported that  with  increasing  public  expenditure,  and  the  neces- 
sary part  which  the  state  plays  in  the  life  of  the  individual,  bor- 
rowing, if  necessary  to  the  proper  administration  of  the  state, 
may  be  legitimately  used.  It  is  shown  that  the  influences  which 
produced  the  restrictions  on  debt  also  resulted  in  the  introduc- 
tion of  a  philosophy  of  laissez  faire :  that  public  debt  and  state 
activity  were  condemned  together.  This  was  a  confusion  of  is- 
sues. The  reasons  for  this  confusion  are  treated  at  some  length. 
It  is  also  shown  that  the  prohibition  against  snhsidies  to  private 
capital  are  necessary  and  their  effect  wholesome ;  but  it  is  main- 
tained as  a  final  conclusion  that  borrowing  from  the  point  of 
view  of  state  dynamics  is  a  legitimate  means  of  securing  control 

[8] 


over  funds  necessary  for  the  highest  development  of  the  state 
and  for  the  most  complete  execution  of  its  functions. 

Part  II  is  concerned  with  an  analysis  of  the  constitutional  re- 
strictions on  municipal  indebtedness.  It  is  also  part  historical, 
part  analytical  and  part  critical. 

Part  II,  Chapter  1,  describes  the  environment  which  produced 
these  restrictions.  It  is  shown  to  be  essentially  the  same  which 
produced  the  crisis  of  1873.  The  distinguishing  characteristic, 
from  the  standpoint  of  municipal  finance,  was  the  enormous  sub- 
sidies given  to  private  capital,  particularly  to  capital  for  railroad 
building.  Against  this  practice  people  revolted  in  the  70s ;  first 
prohibiting  it  or  conditioning  its  use;  and  later,  to  escape  the 
burden  which  the  guaranty  of  interest  involved,  limiting  the  debt 
to  a  certain  percentage  of  the  assessed  value  of  property.  The 
movement  against  the  abuse  of  credit  was  general.  This  fact  is 
emphasized,  and  the  experience  in  New  York  in  passing  her  con- 
stitutional restrictions,  and  the  attitude  of  the  courts  in  Michi- 
gan, Wisconsin,  and  Iowa  on  the  lending  of  credit  given  in  some 
detail.  The  chapter  closes  with  a  general  summary  of  the  peo- 
ple's  attitude  toward  municipal  debt  and  with  a  statement  of  the 
shape  it  assumed  in  constitutional  restrictions. 

Part  II,  Chapter  2,  deals  with  the  nature  of  the  constitutional 
restrictions  on  municipal  indebtedness,  and  centers  about  the  dis- 
cussion  of  (a)  prohibitions  against  subsidizing  private  capital, 
(b)  the  limiting  of  the  debt  to  certain  percentage  of  the  assessed 
value  of  property,  (e)  the  requirements  for  referendum  votes 
for  bonded  debt,  (d)  the  requirements  that  debt  shall  be  paid 
within  a  certain  period,  and  that  an  annual  direct  tax  shall  be 
levied  to  pay  the  interest  as  it  accrues  and  the  principal  at  ma- 
turity, (e)  the  omission  of  debt  for  certain  purposes  from  the 
constitutional  limit, -and  (f)  the  expansion  of  the  limit  for  debt 
for  certain  purposes.    Each  of  these  topics  is  treated  from  the 
point  of  view  of  the  restrictions  in  the  different  states,  and  espe- 
cial attention  is  given  to  the  definitions  of  debt  and  the  meaning 
of  the  constitutional  limits  in  Oklahoma,  New  York,  and  Vir- 
ginia.   An  attempt  is  made  in  this  chapter  to  state  the  principles 
involved  and  not  to  make  a  complete  catalogue  of  the  restrictions 
themselves. 

[9] 


■IMita 


10 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


u 


1 


Part  II,  Chapter  3,  is  almost  wholly  critical.  It  is  concerned 
with  the  practice  of  limiting  municipal  debt  by  the  present  con- 
stitutional method.  It  begins  by  distinguishing  the  character 
and  functions  of  the  different  municipal  corporations  which  as  a 
rule  have  borrowing  powers,  and  concludes  in  this  connection  that 
the  powers  of  borrowing  given  to  them  should  vary  according  to 
their  character  and  function.  It  therefore  criticizes  the  consti- 
tutional provisions  which  place  municipal  corporations  in  the 
same  category  and  treat  them  all  alike.  The  chapter  then  deals 
with  the  principles  involved  in  the  restrictions,  including  among 
others  the  following  general  topics: 

(A)  The  prohibitions  against  municipalities  lending  their 
credit.  The  value  of  such  prohibitions  is  acknowledged  and  the 
belief  expressed  that  they  should  be  general  and  absolute. 

(B)  (a)  Basing  the  borrowing  power  of  municipalities  upon 
the  assessed  value  of  property.  This  is  objected  to :  (1)  because 
the  assessment  of  property  is  imperfectly  made,  thus  aUowmg 
discriminations  between  political  units  similarly  situated  and 
similarly  able  to  borrow;  (2)  because  borrowing  may  be  and  is 
indulged  in  too  freely  by  increasing  the  assessed  value  of  prop- 
erty,  and  taxes  too  sparingly  used  by  lowering  the  tax  rate; 
(3)  because  these  regulations  make  the  need  for  borrowed  funds 
proportional  to  the  value  of  property;  (4)  because  they  take  no 
Account  of  city  properties  which  are  not  found  on  the  tax  roU. 

(b)  Fixing  the  borrowing  power  at  a  certain  percentage  of  the 
assessed  value  of  property  presupposes  a  definite  relation  between 
private  and  public  income,  and  fails,  therefore,  to  adequately 
provide  for  constantly  expanding  public  needs. 

(c)  From  the  ability  to  issue  bonds  for  all  purposes  up  to  the 
maximum  period  allowed  in  the  constitutions  the  canon  of  equal- 
ity in  taxation  between  the  present  and  the  future  is  violated. 

(d)  The  extension  of  the  maximum  amount  of  debt  accorded  to 
some  localities,  as  for  instance,  counties,  has  generally  no  regu- 
lating force  because  it  is  too  high. 

(e)  The  sinking  funds  required  extend  to  productive  and  un- 
productive properties  alike,  and  in  both  cases,  almost  without  ex- 
ception, are  supported  by  taxation. 

[10] 


(f )  The  grant  of  borrowing  powers  to  all  independent  corpora- 
tions results  in  over-lapping  of  powers  and  compounding  of  debt. 

(g)  The  omission  of  temporary  loans  from  the  debt  limit  seems 
unwarranted  as  it  works  out  in  practice,  as  does  also  the  omission 
of  debt  for  certain  purposes  which  are  supposed  to  be  revenue 
bearing,  when  the  bonds  issued  therefore  are  secured  by  taxation. 

The  general  conclusion  is  that  the  constitutional  restrictions 
are  open  to  severe  criticism  from  the  point  of  view  of  fundamen- 
tals and  from  the  practices  that  occur  under  them,  that  they  mis- 
interpret the  functions  of  municipal  credit  and  absolutely  fail  as 
adequate  controlling  provisions. 

Part  II,  Chapter  4,  is  concerned  with  a  statement  and  discus- 
sion of  the  problems  in  municipal  indebtedness  and  with  a  short 
discussion  of  a  possible  solution  for  them.  The  point  of  view 
taken  is  as  follows :  Public  borrowing  is  a  necessity  for  most  poli- 
tical units  and  the  only  way  to  adequately  control  its  use  is  by 
administrative  means.  Debt  is  related  not  to  a  certain  percent- 
age of  the  assessed  value  of  property,  but  to  the  needs  of  the 
communities  which  employ  it.  These  needs  vary  according  to 
the  functions  which  the  communities  perform,  to  their  age,  to  the 
disposition  of  the  people  to  make  improvements,  etc.  Given  a 
certain  need  for  public  income,  it  may  be  acquired  by  taxation 
or  by  borrowing.  How  much  should  be  borrowed  will  depend 
upon  the  uses  to  which  the  funds  are  put.  Borrowing  is  related 
to  the  burdens  it  brings  through  interest  charges  and  to  the  re- 
turns which  follow  its  utilization.  Its  relation  to  property  value 
is  only  secondary.  Value  of  property  gives  ability  to  bear  tax 
burden,  but  it  does  not  tell  how  much  should  be  borne  in  the  form 
of  taxes  and  how  much  in  the  form  of  interest  charges  on  bonded 
debt.  Moreover,  borrowing  involves  a  contact  with  the  money 
market  in  making  loans,  and  difficult  problems  are  associated 
with  it  with  respect  to  the  appropriate  time  for  debt  payment. 
In  this  problem  the  debtors— most  generally  the  taxpayers— are 
also  vitally  interested.  The  fundamental  problems  in  municipal 
debt  are :  first,  to  borrow  to  advantage,  and  this  can  be  done  only 
by  making  the  credit  instruments  that  are  sold  as  acceptable  as 
possible ;  second,  to  pay  the  amount  borrowed  at  the  appropriate 
time  in  order  to  conserve  the  interest  of  the  present  and  future 

[11] 


I 


12  BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 

taxpayers.  Both  problems  are  difficult  ones  and  call  for  expert 
administrative  service  which  addresses  itself  both  to  the  tech- 
nique  of  debt  creation  and  to  the  technique  of  debt  payment. 
Such  a  solution  is  outlined  in  the  following  pages. 

The  general  conclusion  of  Part  II  is :  Municipal  debt  is  neither 
an  absolute  evil  nor  an  absolute  good.  Rightly  used  it  is  a  legiti- 
mate  financial  device,  but  left  uncontrolled  under  the  present 
constitutional  restrictions  it  is  most  generally  abused,  and  the 
only  solution  for  this  abuse,  like  many  other  questions  of  local 
finance,  is  in  expert  administrative  control. 


AN  ECONOMIC  ANALYSIS  OF  THE  CONSTITUTIONAL 
RESTRICTIONS  UPON  PUBLIC  INDEBTEDNESS 
IN  THE  UNITED  STATES 


CHAPTER  1 


THE    GENERAL    ENVIRONMENT    WHICH    PRODUCED 
THE  CONSTITUTIONAL  RESTRICTIONS  ON  STATE 

INDEBTEDNESS 

T^ie  several  states  had  played  a  minor  role  in  a  financial  way 
before  about  1830.^  Some  of  them  had  inherited  large  war 
debts  but  these  were  assumed  by  the  Federal  government,  and 
notwithstanding  that  the  War  of  1812  drew  heavily  upon  their 
financial  resources,  their  combined  debt  was  not  more  than  $13,- 
000,000^  at  the  beginning  of  1830.  About  this  time,  however, 
various  causes  and  conditions  contributed  toward  their  financial 
development.  The  national  government  had  changed  its  early 
policy  with  respect  to  internal  improvements.  The  country 
had  recovered  from  the  effects  of  the  War  of  1812;  the  period 
of  suspension  of  specie  payments  had  passed ;  and  the  number 
of  banks,  particularly  between  the  periods  of  the  First  and  of 
the  Second  United  States  Bank,  had  grown  enormously.*  More- 
over, the  agricultural  possibilities  of  the  country  began  to  make 
themselves  felt  and  their  development  seemed  to  depend  almost 
wholly  upon  the  adequacy  of  transportation  facilities  and  the  ex- 
istence of  markets.*  ,  Both  of  these  were  in  process  of  realiza- 


[12] 


'  Valuation,  Taxation  and  Indebtedness,  1880,  p.  523.     Washington,  D.  C. 
»  "The  Debts  of  the  States."     Curtis,  B.  R.,  Writings,  vol.  2,  p.  94. 
•  89,  in  1811 ;  246,  in  1816.     Hunt's,  Merchant  Magazine,  vol.  5,  pp.  186-7. 
•Message   of  Dewltt   Clinton,  Governor  of  New  York.     Lincoln,   C.  Z.,  Me9- 
tagesj  etc.  vol.  2,  pp.  899-900. 

[13] 


u 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


SECRI ST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


15 


tion.  The  national  government  had  paid  its  debt  in  1834,  and 
American  credit  in  foreign  countries  was  at  a  premium.*  This 
fact  was  strongly  emphasized  by  the  press  and  served  to  stimu- 
late foreign  investments  in  the  United  States  and  to  incite 
Americans  to  engage  in  the  most  speculative  enterprises.^  Po- 
litical philosophy  was  ripe  for  increased  state  activity,  espe- 
cially in  New  York,  where  Governor  Clinton  had  declared  it  to 
be  one  of  the  first  duties  of  the  state  to  facilitate  and  perfect 
means  of  transportation,^  and  to  secure  through  government 
the  greatest  good  to  the  greatest  number.®  The  interests  of 
the  manufacturer,  the  trader,  the  man  of  commerce  were  all  one 
to  him,  and  their  combined  welfare  most  completely  assured 
when  people  were  buying  in  the  cheapest  and  selling  in  the 
dearest  markets.  It  was  the  business  of  the  government  to  see 
that  such  was  actually  the  case.**  This  could  be  done  only  by 
the  existence  of  an  adequate  system  of  transportation.  Here 
was  a  definite  statement  of  the  necessity  of  canals,  roads,  etc.,  in 
the  economy  of  the  state.  Moreover,  trade  rivalry  between  New 
York,  Pennsylvania,  and  Maryland  was  keen  because  of  the  de- 
sire of  each  to  make  its  respective  eastern  port  the  gateway  to 
the  interior.^**  It  was  this  particular  fact  as  much  as  any  other 
which  explains  the  beginning  of  internal  improvements  in 
Pennsylvania.  The  success  of  the  Erie  canal  on  the  north  in  di- 
verting western  trade  to  New  York  City  was  used  as  a  cudgel 
to  force  the  legislature  to  fall  in  line.^^ 


"  Bourne,  E.  G,,  History  of  the  Surplus  Revenue,  1837,  p.  14. 

•  Curtis,  B.  R.,  Writings,  Vol.  2,  p.  95 ;  Message  of  Governor  Thomas  of 
Maryland,  1842,  in  Niles,  H.,  Register,  vol.  63,  p.  315. 

'Message  of  1818.     Lincoln,  C.  Z.,  Messages,  etc.,  vol.  2,  p.  899. 

"  Message  of  1825,  ibid.  Vol.  3,  p.  63.  In  his  annual  message  of  1819,  Gov- 
ernor Clinton  said :  "Character  is  as  important  to  states  as  to  individuals,  and 
the  glory  of  a  republic  founded  on  the  promotion  of  the  general  good,  Is  the 
common  property  of  all  its  citizens."     Ibid.,  vol.  2,  p.  967. 

»  Message  of  1819,  Ibid.,  2,  p.  965. 

"  Vide,  Senate  Report :  "The  Pennsylvania  and  Ohio  Canal."  December  31, 
1834,  p.  4,  in  Reports,  Messages  and  Other  Communications  made  to  the  Thir- 
ty-third General  Assembly  of  the  State  of  Ohio,  I8S4.  Vide,  also,  "Report  of 
Committee  on  Roads  and  Bridges,"  January  17,  1829,  In  Hazard,  Register  of 
Pennsylvania,  vol.  3,  p.  66. 

"  Even  as  late  as  1838,  at  the  time  of  the  Constitutional  Convention  of 
Pennsylvania,  it  was  brought  out  in  the  debates  that  it  would  be  unwise  to  put 
Pennsylvania  at  a  disadvantage  with  her  rival  New  York  by  limiting  her  debt 
In  any  way.     Pennsylvania  Constitutional  Debates,  1838,  Vol.  xii,  p.  119. 


[14] 


As  early  as  1829,  the  constitutionality  of  the  Second  United 
States  Bank  had  been  questioned,  and  by  1833  the  government 
deposits  were  withdrawn  and  placed  among  the  several  state 
banks.  A  great  impetus  was  given  to  the  founding  of  these  in- 
stitutions and  their  number  increased  rapidly."  Banking  capi- 
tal for  the  ten  years  ending  1830,  had  increased  but  $8,100,000 ; 
but  for  the  six  years  ending  1836,  it  increased  $181,050,000.^' 
Prices  due  to  the  inflated  condition  of  the  currency  had  risen 
rapidly,^*  credit  was  easy  to  get  and  speculation  rife  in  the 
whole  industrial  field.  Moreover,  the  surplus  revenue  under 
the  adjusted  tariff  of  1828  poured  into  the  Treasury,  and  an 
outlet  was  sought  for  it  after  the  payment  of  the  national  debt 
in  1834.^^  The  disposition  of  this  surplus  among  the  states 
in  1837  only  added  to  the  financial  confusion,  and  inclined  some 
of  the  states  not  only  to  look  upon  the  ** deposit''  as  a  perma- 
nent gift,^^  but  to  expect  further  gifts.^^  Speculations  in  land 
were  demoralizing  and  were  only  temporarily  checked  by  the 
issue  of  the  ** Specie  Circular"  of  President  Jackson.  Land  in 
the  most  favored  western  territory  was  sold  not  for  money  alone 
but  in  the  majority  of  eases  for  individual  and  bank  notes,^®  and 
became  a  staple  article  of  exchange.  **The  habitudes  of 
thought  connected  with  the  constantly  advancing  value  of  real 
property;  the  custom  of  dickering  makes  almost  every  individ- 

Clrculatlon 
I  61,323,898 
94,839,570 
103,692,495 
140,301,038 
.       -  149,185.890 

Hunt's  Merchant  Magazine,  Vol.  5,   pp.  186-187. 
"  Niles,  H.,  Register,  vol.  51,  p.  162. 

"Curtis,  B.  R.,  "The  Debts  of  the  States."  WHtings,  etc.,  vol.  2,  p.  97. 
""The  liquidation  of  the  public  debt  and  the  disturbed  situation  of  affairs 
In  Europe  are  throwing  back  upon  capitalists  a  large  portion  of  their  funds, 
and  filling  the  vaults  of  our  banks  with  a  redundancy  of  the  precious  metal." 
"Reports  on  Railroads,"  1831,  Senate  Report,  29th  Assembly,  1st  Session,  Ohio, 
p.  7. 

"Mr.  Hilster  in  the  Pennsylvania  Constitutional  Convention.  Debates,  vol. 
xii.  p.   iii. 

"  Pennsylvania's  share  of  the  possible  five  to  ten  millions  of  deposit  was  looked 
forward  to  as  equivalent  to  the  interest  on  a  twenty-four  million  stat^i  debt. 
"Report  on  Railroads  and  Canals  to  the  House  of  Representatives."  Pennsyl- 
vania, Feb.  26,  1829.     Hazard,  Register  of  Pennsylvania,  vol.  3,  pp.  150-151. 

"  Hunt's,  Merchant  Magazine,  vol.  xi,  pp.  119-120. 

[15] 


"  Year 

Number 

of 

State  Banks 

1830 

330 

1834 

506 

1835 

558 

with  branches,  704 

1836 

567 

with  branches,  713 

1837 

634 

with  branches,  788 

16 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


ual  a  speculator.''"  The  whole  temper  of  the  time  fostered  a 
reliance  on  the  future  and  engendered  a  willingness  to  enter 
upon  the  most  daring  financial  projects. 

In  this  environment  of  wild-cat  banking,  credit,  speculation 
and  faith  in  the  outcome  of  things,  the  value  of  inland  naviga- 
tion was  demonstrated  by  the  Erie  canal,  which  was  finished  in 
1825.    With  this  project  completed,  the  movement  for  internal 
improvements  spread   with   renewed  vigor.     Pennsylvania  and 
Ohio  began  their  activities  in  1825,  and  although  the  debt  of  the 
former  in  1830,  was  only  $6,300,000,=^^   it  was   $24,329,004   in 
1837 ;  while  that  of  the  latter  was  $400,000,  in  1825,  and  $5,500,- 
000  in  1836.    By  1835,  Maine  had  50  miles  of  completed  canals ; 
Massachusetts  had  47 ;  Massachusetts  and  Rhode  Island  had  45 ; 
Connecticut  had  58 ;  New  York,  678 ;  New  York  and  Pennsyl- 
vania, 36 ;  New  Jersey,  101 ;  Pennsylvania,  857 ;  Delaware  and 
Maryland,  14 ;  Maryland,  10 ;  Maryland  and  Pennsylvania,  341 ; 
Ohio,  571 ;  Virginia,  30 ;  Virginia  and  North  Carolina,  22 ;  Geor- 
gia, 66  and  Louisiana,  100.^^     The  aggregate  state  debt  in  1835 
was  $60,000,000 ;  from  1835  to  1838,  $108,423,808  was  added  to 
this,  and  by  1839  it  exceeded  $183,000,000."    Indiana,  Illinois, 
Michigan,  Arkansas,  Florida  and  Mississippi  had  no  debt  in 
1830 ;  in  1840,  their  combined  debt  was  more  than  $44,000,000." 
The  question  naturally  arises  why  did  not  the  states  leave  the 
development  of  transportation  to  private  initiative.    The  an- 
swer to  this  is  found  not  necessarily  in  any  aversion  toward  cor- 
porations per  se,  but  in  the  service  which  it  was  hoped  the  im- 
provements would   perform.    Their   purpose,   theoretically   at 
least,  was  general  welfare — as  it  turned  out  it  was  in  many  cases 
private  welfare  primarily  with  only  incidental  public  benefit — 
for  they  were  intended  to  be  the  sources  of  enormous  revenues 
to  the  states,  and  the  cause  of  untold  increase  in  private  and  pub- 
lic wealth.    It  is  not  natural,  therefore,  that  such  a  field  of  ac- 


"Lauman,  J.  H.,  History  of  Michigan,  1839,  p.  297. 

» House  Document,  296,  nth  Congress,  Srd  Session.  Report  on  "Relief  of  the 
States"  by  Johnson,  W.  C,  p.  47. 

»  Nlles,  H.,  Register,  vol.  50,  p.  265. 

*•  Trotter,  Alexander,  Observations  on  the  Financial  Position  of  the  States  of 
North  America,  etc.     London    (1839),   p.   350. 

*  House  Document  296,  27th  Congress,  Srd  Session.  Report  by  Johnson,  W. 
C,  p.  47. 

[16] 


SECRI ST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


17 


tivity  should  be  thrown  open  to  private  exploitation  without  at 
least  a  trial  of  state  ownership  and  management.    This  was  par- 
ticularly so  as  there  seemed  to  be  no  prejudice  toward  state  ac- 
tivity of  this  nature  before  1840.^*    The  hopes  of  revenue  to  be 
derived  from  these  ventures  served  effectively  to  quiet  most  of 
the  adverse  criticism  during  the  early  period,  and  the  argument 
of  the  influence  of  transportation  upon  private  wealth  was  like- 
wise effectively  used  as  an  offset  to  failures  following  the  gen- 
eral  crisis  of  1837.25    Moreover  the  accumulation  of  private  capi- 
tal was  insignificant  before  about  1815,2«  and  did  not  satisfy  the 
demand  which  public  and  private  undertakings  created.     For- 
eign investors  were  accustomed  to  buying  national  bonds,  and 
when  the  supply  of  these  was  cut  off  by  the  payment  of  the 
national  debt,  a  corresponding  demand  for  state  bonds  devel- 
oped—the distinction  between  the  two  not  at  all  times  being 
clearly  recognized.  =^^    Besides,  the  financial  affair.^  of  private 
companies  were  not  so  well  known  as  were  those  of  the  states,  and 
of  course  their  credit  suffered  on  ^hat  account.    This  is  one  of 
the  reasons  for  the  scramble  for  state  aid  on  the  part  of  private 
capital.     Indeed,  the  credit  which  private  companies  had  in  for- 
eign countries  is  directly  attributable  to  the  guarantee  of  the 
state  which  their  bonds  received.-^    In  addition  to  the  difficulty 
private  individuals  would  have  experienced  in  getting  control 
of  the  requisite  capital,  there  was  a  pretty  well  defined  feeling 
that  these  public  improvements,  since  they  were  expected  to  be 

« Adams,  H.  C,  "Introduction"  In  Dixon.  F.  H..  State  Railroad  Control,  p   5 
On  the  expectations  of  revenue,  see   the  Messages  of  Governor  Clinton  of 
ivew  lork,   in  Lincoln,   C.  Z.,  Messages,  etc.  vol.  2,  pp.  908-909,  965:  "Legis- 
lative Report  on  the  Columbia  Railroad"  in  Hazard,  Register  of  Pennsylvania, 
1800      ^'  "Legislative  Report  of  the  Committee    on    Ways    and    Means" 

1829,  /Wrf.,  vol.  3,  p.  191 ;  Lincoln,  C.  Z.,  Constitutional  History  of  Neic  York 

iT*      of;  ^^^'  ^^^^^P'  ^-  ^'  '^^^  ^***^  ^^'■*«   0/  PennsylvaMa.     Appendix 

2«CalIendar,  G.  S.,  "State  Enterprise  and  Corporations."  The  Quarterly 
Journal  of  Economics,  vol.  xvil,  p.  131. 

"Some  confusion  Is  shown  in   a  letter  from   Baring  Brothers,— an   English 
ranking  firm— addressed  to  Daniel  Webster  asking,  "Whether  the   Legislature 
or  one  of  the  States  nas  legal  and  constitutional    power   to    contract    loans    at 
home  and  abroad."     This  is  quoted  from  Nlles,  H..  Register,  vol.  57.    p    273 
December  28,   1839.  .    f    *io. 

*»  Trotter,  Alexander,  op.  cit,  pp.  87-88 ;  American  Quarterly  Review,  vol  8. 
P.  310  December,  1830.  "Petition  of  the  President  and  the  Directors  of  the 
StaT    ^nl  Company.  "  1834,  p.  3,  In  Reports  to  the  General  Assembly  of  the 

[17] 


Ig  BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 

revenue  bearing  and  to  express  the  general  desire  of  the  people 
should  be  undertaken  by  the  states  themselves  and  not  by  private 
individuals  or  incorporated  companies.  The  reason  for  this  is 
obvious  The  legislature  being  the  representative  of  the  people 
is  supposed  to  consult  the  public  welfare,  while  a  private  com- 
pany  is  supposed  to  consult  its  own  pecuniary  interests,  and  these 
do  not  always  accord  with  the  best  commercial  and  agricultural 
interests  of  the  country.  Road  building  was  held  to  be  the 
particular  province  of  the  state  and  canal  building  was  regarded 
as  an  equally  legitimate  state  function.  ,    •    ^  v^ 

The  period  1830-1837  has  been  admirably  characterized  by 
Judge  B.  R.  Curtis  from  whom  we  cannot  do  better  than  to  quote 
at  some  length.    After  speaking  of  the  effects  of  the  ^iist-bu- 
tion  of  the  surplus  among  the  states,  of  the     deposit     of  the 
United  States^  funds  with  the  state  banks,  of  the  rapid  increase 
in  their  number,  and  of  the  growth  of  population  of  agncuUure 
and  manufacturing  enterprises,  etc.,  he  says:     If  we  add  all 
these  circumstances  together,  we  shall  have  little  cause  to  wonder 
that  the  American  people  were  brought  into  that  most  extra- 
ordinary  condition  in  which  their  public  debts  were  contracted. 
Former  times  may  have  exhibited  as  great  madness,  but  it  reached 
fewer  persons.     ...     At  this  time     .     .     .     wealth  had 
been  both  accumulated  and  diffused  to  an   extent  unknown. 
Wonderful  improvements  in  the  means  of  communication  across 
wide  seas  and  through  great  continents  had  brought  all  civilized 
and  especially  all  commercial  men  within  one  common  atmos- 
phere  of  settlement  and  opinion.     A  long  and  unbroken  peace, 
in  whose  sunshine  population  had  increased  and  production  been 
stimulated,  and  private  enterprise  suffered  to  act  freely,  inclined 
men  to  large  undertakings.     .     .     .     M.n  acted  as  if  a  short 
and  secure  road  to  wealth  had  been  discovered,  on  which  all 
might  travel,  and  he  who  went  the  fastest  would  be  the  first  to 
reach  the  desired  end.     The  result  was  such  a  morbid  tendency 
to  excess  in  financial  affairs  as  had  never  before  been  witnessed. 
In  those  countries  where  the  currency  was  bank  paper,  the  quan- 
tity of  money  in  circulation  was  enormously  increased.    Partly 
in  consequence  of  the  increase,  and  partly  on  account  of  the 
sanguine  hopes  of  men,  prices  continued  to  rise.    All  uses  of 

[18] 


SECRI ST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


19 


capital  seemed  to  be  followed  by  certain  and  large  returns,  and 
men  were  therefore  eager  to  borrow.  All  pursuits  appeared  to 
be  safe  and  prosperous,  and  therefore  those  who  had  money  were 
desirous  to  lend  it.  So  much  security  was  felt,  that  little  se- 
curity was  asked ;  and,  to  obtain  money  nothing  more  was  neces- 
sary than  to  show  the  lender  that  it  was  to  be  employed  in  some 
magnificent  scheme,  which  stood  well  with  the  large  expectations 
of  the  times,  and  was  in  season  with  the  glorious  summer  of 
men's  hopes. 

"At  this  period  and  partly  in  consequence  of  this  extraordi- 
nary state  of  things,  there  arose  in  this  country,  a  vehement  de- 
sire to  construct  great  public  works  chiefly  such  as  facilitate  and 
promote  internal  improvements.     We  do  not  mean  to  say  that 
this  desire  was  then  new.     The  people  of  this  country  are  far 
too  sagacious  not  to  have  discovered  before  that  time  the  great 
value  of  such  works.     .     .     .     They  have  not  much  taste  for 
cathedrals  and  palaces,  but  Hhe  useful  magnificence  of  roads  and 
bridges',  excites  their  admiration.     They  knew  well  enough  that 
a  canal  or  a  railroad,  piercing  a  great  tract  of  country  was  of 
immense  importance  to  them.     They  quite  comprehended  its  ob- 
ject, and  did  not  underestimate  its  effect ;  and  when  their  hopes 
had  been  raised,  and  their  judgment  somewhat  distorted  by  the 
fever  in  their  veins,  and  they  saw  the  means  of  accomplishing 
these  great  objects  not  only  within  reach,  but  almost  thrust  into 
their  hands,  it  is  not  strange  that  they  seized  upon  them  with  in- 
cautious eagerness,  and  expended  them  with  a  prodigality  some- 
what in  proportion  to  the  ease  with  which  they  were  obtained.  "^^ 
Mr.  Curtis  has  been  quoted  at  length  because  he  has  attempted 
to  enterpret  these  times  so  as  not  to  excuse  the  folly  but  to  do 
justice  to  the  people  under  their  peculiar  environment. 

To  summarize :  The  newness  of  the  country,  its  expanse  and 
industrial  possibilities,  the  need  for  easy  and  cheap  means  of 
communication,  the  lack  of  private  capital,  and  the  rivalry  of 
the  eastern  seaboard  cities  for  the  trade  of  the  west  started  the 
states  on  a  campaign  of  internal  improvements.  Some  of  the 
states  caught  the  spirit  early.    The  Erie  canal  was  begun  in 

"Curtis,  B.  E.,  "The  Debts  of  the  States,"  1844,  Writings,  Tol.  2,  pp.  9T-99. 

.    [19] 


I    ! 


.20  BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 

1817  and  completed  in  1825.    Its  success  was  a  signal  for  the 
race  which  was  to  end  in  disaster.    With  the  change  m  the 
national  financial  policy-the  downfaU  of  the  Second  Umted 
States  Bank,  the  -deposit-  of  public  money  in  state  rnstitu- 
lions,  and  finally  the  distribution  of  the  Surplus-the  Period  ^^ 
state  banking  was  ushered  in,  and  the  ^credit  system^  started 
on  the  way  for  permanent  establishment.    State  activity  showed 
itself  in  two  ways:  the  construction  of  works  of  mternal  im- 
provement  by  the  states  themselves  or  by  subsidized  private  com. 
panics,  and  the  establishment  of  credit-manufacturing  institu- 
tions  or  the  chartering  of  them  by  private  persons  w^^h  lucrative 
privileges.    Public  sentiment  revolted  against  the  latter  ifi  the 
Free  Banking  Act  of  New  York  in  1838,  and  spread  over  most 
of  the  states  of  the  middle  west  by  1855.    Opposition  to  indiB- 
criminate  borrowing  and  pledging  state  credit  began  shortly 
after  the  crisis  of  1837  and  realized  itself  in  constitutional  pro- 
£ot  in  many  states  in  the  early  forties.    It  is  the  purpose 
of  the  second  chapter  to  explain  the  immediate  causes  for  such 
opposition  and  the  chief  facts  in  relation  to  the  same  in  some  of 
the  most  representative  states. 


SECRI  ST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


21 


[20] 


CHAPTER  2 

THE  IMMEDIATE  CAUSES  OF  THE  CONSTITUTIONAL 

RESTRICTIONS  ON  STATE  INDEBTEDNESS  WITH 

PARTICULAR  REFERENCE  TO  NEW  YORK 

AND  PENNSYLVANIA 

The  early  constitutional  restrictions  on  state  indebtedness  may 
be  traced  most  directly  to  the  failure  of  internal  improvements, 
and  to  the  lapse  of  the  market  for  American  securities  in  1839^ 
which  resulted  partly  from  debt  repudiation  by  some  of  the 
states,^  and  partly  from  the  crisis  of  1837.  The  legislatures  had 
abused  their  power  to  borrow  money  and  in  catering  to  the 
clamor  of  the  different  interests  of  their  respective  states,  eighteen 
of  them  had  authorized  the  issue  of  $108,223,808  of  stock  in  the 
three  and  one-half  years  between  1835  and  1838.«"  The  market 
for  securities  was  overcrowded,  cities  planned  on  paper  had 
failed  to  spring  forth  full  grown  when  served  by  the  beneficent 
influence  of  a  local  canal ;  canals  were  competing  with  each  other 
for  an  all  too  meagre  business  and  private  capital  and  activity 
were  developing.  It  was  at  this  time  that  public  opinion  waa^ 
aroused  and  that  provisions  were  incorporated  into  the  funda- 
mental law  so  as  to  effectively  protect  the  people  from  excessive 
taxation.  In  the  early  period  of  the  improvement  crusade  pub- 
lic debts  were  looked  upon  as  unreal  because  they  represented 
only  a  small  fraction  of  the  wealth  added  to  the  country  by  the 
improvements  themselves.  The  reality  of  the  debts  could  no 
longer  be  ignored,  for  the  time  of  final  reckoning  in  many  casea 
was  swiftly  approaching.    Public  sentiment  was  eager  for  rigid 

^The  Democratic  Review,  vol.  10,  p.   12,   (1842) 

» Maryland,  Florida,  Louisiana,  Arkansas,  Illinois.  Indiana,  and  Mlchlean 
^ere  delinquent  in  1845.  Bankers  Magazine  (London)  vol  5  p  220  Th^ 
Journal  is  quoting  The  Democratic  Review.  Nov.  1845.  ^ 

The  Democratic  Review,  voL  10,  p.  12. 

[21] 


22  BULLETIN  OF   THE   UNIVERSITY   OP    WISCONSIN 

restrictions  and  these  we  tod  placed  in  the  constitutions  of  the 

^ttoL  Island  was  the  first  state  to  give  definite  ^^Vr^'^^Jo 
this  sentiment  in  constitutional  form.  The  convention  to  form 
the  constitution  of  1842  was  called  primarily  to  make  some  change 
in  the  local  representation  and  in  the  judiciary,'  hut  when  it  had 
completed  its  work  we  tod  the  following  as  one  of  the  new  pn,vi- 
sions  of  the  constitution.  "The  general  assembly  shall  have  no 
power  hereafter,  without  the  express  consent  of  the  people,  to  in- 
L  state  debt  to  an  amount  exceeding  50,000  dollars,  except  in 
time  of  war,  or  in  case  of  insurrection :  nor  shall  they  m  any  case, 
without  such  consent,  pledge  the  faith  of  the  state  for  the  pay- 
ment of  the  obligations  of  others. '  -  This  provision  did  not,  how- 
ever, become  the  pattern  which  has  been  so  accurately  followed  by 
the  other  states.    New  Jersey,  with  practically  no  debt,  furnished 

this  in  1844.'  .        .    .. 

The  constitutional  convention  of  New  Jersey  was  unique  in  its 
membership.    It  was  constituted,  by  express  agreement   of  an 
equal  number  from  each  party,  and  consisted  of  fifty-eight  mem- 
bers of  whom  twenty  were  lawyers;  three,  ex-governors;  one  a 
chief  justice;  one  an  associate  justice  and  several  ex-members  of 
Congress  «    ' '  Politics  was  laid  aside  and  the  welfare  of  the  state 
calmly  considered. ' "    The  following  is  the  provision  adopted  rel- 
ative to  state  debt:    "The  legislature  shall  not,  in  any  manner 
create  any  debt  or  debts,  liability  or  liabilities,  of  the  state,  which 
shall  singly,  or  in  the  aggregate  with  any  previous  debts  or  lia- 
bilties  at  any  time  exceed  one  hundred  thousand  dollars,  except 
for  purposes  of  war  or  to  repel  invasion,  or  to  suppress  insurrec- 
tion, unless  the  same  shall  be  authorized  by  a  law  for  some  single 

.      ...  -  «^r»^ihit4nn  Inserted  In  the  constitution  of  evr»» 

...we  would  rejoice  to  see  a  proMbm^  ^^^^  ,^^  ,,y 

''^''jyZuT.^'^Te  DZoe^^Re^L.  vol.  10,  p.  15.     (1842);  .i<.e. 
porpose  whatsoever.      Tne  expressed  that  there  Is  "nothing  m  any 

ibid.,  vol  f  •  P-„f,'^»'  7„'"t„7;„Veet  us  from  fraudulent  Insolvency  or  excessive 
?'  "«„rbut  ?he    o"aCg'en?  dlshon  s.y  and  discretion  of  the  legislature." 
**Ces   H.!  b'^X,  vol.  60,  p.  21.  quoting  the  Baltimore  American. 

trTr^;;  sra?;"eht':kTan.'9.  1844.  was  ,99.566.57.    Nile,.  H..  He^- 

ter,  vol.  65,  p.  324. 

8Niles,  H.,  Register,  vol.  66,  p.  208.     (18^4). 
•Niles.  H.,  Register,  vol.  66,  p.  291.     (1844). 

[22] 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


23 


work  or  object,  to  be  distinctly  specified  therein ;  which  law  shall 
provide  the  ways  and  means,  exclusive  of  loans,  to  pay  the  inter- 
est of  such  debt  or  liability  as  it  falls  due,  and  also  to  pay  and 
discharge  the  principal  of  such  debt  or  liability  within  thirty-five 
years  from  the  time  of  the  contracting  thereof,  and  shall  be  ir- 
repealable  until  such  debt  or  liability,  and  the  interest  thereon, 
are  fully  paid  and  discharged ;  and  no  such  law  shall  take  effect 
until  it  shall,  at  a  general  election,  have  been  submitted  to  the  peo- 
ple, and  have  received  the  sanction  of  a  majority  of  all  the  votes 
cast  for  and  against  it  at  such  election ;  and  all  money  to  be  raised 
by  the  authority  of  such  a  law  shall  be  applied  only  to  the  specific 
object  stated  therein,  and  to  the  payment  of  the  debt  thereby 
created/ '^*^  Provision  was  also  made  against  the  state  lending 
its  credit  in  any  case.  Niles,  in  commenting  on  these  provisions 
says :  *  *  New  Jersey  is  profiting  by  the  experience  of  some  of  her 
sister  states.  She  has  not  suffered  from  the  pressure  of  a  public 
debt.^'i^ 

Although  it  was  Rhode  Island  and  New  Jersey  which  first  im- 
posed the  restrictions  on  state  indebtedness,  it  was  New  York 
which  first  started  the  agitation  for  the  same.  The  explanation 
of  the  origin  of  the  New  York  restrictions  furnish  an  interesting 
chapter  in  her  financial  history. 

New  York 's  financial  history  from  the  beginning  of  her  internal 
improvement  movement  down  to  the  formation  of  her  constitu- 
tion in  1846  can  be  divided  into  two  main  periods.  The  first  ex- 
tends from  1817  to  1826 ;  and  the  second,  from  1826  until  the  act 
of  1842,  which,  in  a  modified  form,  became  a  part  of  the  constitu- 
tion. Both  were  periods  of  excessive  borrowing,  but  the  finan- 
cial philosophies  which  characterized  the  two  were  widely  dif- 
ferent. 

During  the  period  1817  to  1825 — nine  years — New  York  in- 
creased her  debt  $7,737,770^2  ^nd  did  not  decrease  it  at  all.  But 
in  1817  she  wisely  set  aside  a  definite  revenue^^  for  the  payment 
of  the  interest  on  loans,  and  for  the  final  redemption  of  the  prin- 

^'^  Constitution,   1844.     Art.  IV,  Sec.  6,  par.  4. 
"Niles,  H.,  Register,  vol.  66,  p.  323.     (1844). 
"New  York  Assembly  Documents,  No.  236,  p.  7,   (1845). 
"  Revenue  from  the  Erie  and  the  Champlain  Canals,  and  receipts  Irom  the 
auction  and  salt  duties. 

[23] 


I 


24 


BULLETIN  OF  THE  UNIVERSITY   OF   WISCONSIN 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


25 


t  ! 


1  I 


cipal.     This  was  a  measure  of  caution  against  the  possible  failure 
of  her  canals,  and  similar  precautions  were  taken  until  1825.^* 
In  this  year,  however,  with  the  completion  of  the  Erie  Canal  and 
the  beginning  of  a  system  of  lateral  canals,  a  radically  different 
policy  was  adopted.     Revenue  from  the  latter  could  not  be  hoped 
for  for  some  time  even  by  the  most  sanguine.    Notwithstanding 
this,  the  state  tax,  which  during  the  period  1816  to  1825  had  paid 
into  the  Treasury  three  millions  of  dollars,  was  discontinued,  and 
a  glorious  epoch  of  "freedom  from  direct  taxation''  ushered  in. 
Not  even  the  interest  on  amounts  borrowed  for  the  lateral  canals 
was  provided  for,^^  and  the  whole  drain  had  to  fall  on  the  Gen- 
eral Fund.     After  the  repeal  of  the  state  tax,  this  was  rapidly 
being  depleted.     But  the  treasury  protests  were  not  sufficient 
guard  against  the  numerous  petitions  for  canals  that  flooded  the 
legislature.     The  Comptroller  had  protested  against  such  meth- 
ods of  public  financing,  yet  Governor  Clinton  not  only  failed 
to  give  him  support  but  maintained  that  the  revenue  arising  from 
improvements  was  a  false  test,  and  that  ''the  means  of  the  state 
are  ample— her  resources  great— her  credit  equal  to  any  emer- 
gency."'®    The  Comptroller  each  year  renewed  his  recommenda- 
tions for  a  state  tax ;  Governors  Throop  and  Marcy  both  repeat- 
edly asked  for  the  exactment  of  the  same,  but  to  no  avail.    Not- 
withstanding that  the  ordinary  expenditures  in  1829  exceeded 
the  resources  by  $173,000,  the  legislature  authorized  expenditure 
for  the  repair  of  the  Oswego,  and  the  Qyaga  and  Scuaca  canals 
to  be  paid  out  of  the  General  Fund.     In  1831,  Governor  Throop 
laid  down  the  general  principle  that  should  govern  state  bor- 
rowing, maintaining  that  the  items  of  public  benefit,  probable 
return  of  revenue  and  the  means  of  the  state  should  be  constantly 
held  in  mind,  and  if  the  improvements  required  would  not  pay 
the  interest  and  principal  in  a  reasonable  time,  the  legislature 
should  consider  the  advisability  of  levying  a  direct  tax.     He  for 


"  In   1824,    "a  provision  was  added  to  a  law  authorizing    a    loan     . 
that  the  Commissioners  of  the  Canal  Fund  should  borrow  only  such  amounts  as 
they  could  pay  interest  upon,  including  payments  on  previous  loans,  from  reve- 
nues of  the  fund  in  their  hands.     Comptroller's  Report,  1837,  p.  14. 

^'  Ten  millions   was   authorized    to  be  borrowed    in    the    period    1826-1836. 
Comptroller's  Report,    (1837),   p.   15. 

*•  Quoted  in  Hunt's  Merchant  Magazine,  vol.  xxiii,  p.  621. 


one  was  opposed  to  carrying  on  internal  improvements  by  direct 
taxation.  ^^ 

By  1835  the  General  Fund  was  all  but  exhausted.  Borrowing 
continued  and  the  legislature  stubbornly  refused  to  enact  a  law 
for  a  direct  tax.^®  In  1836,  a  still  further  breach  of  financial 
etiquette  was  indulged  in  when  the  legislature  provided  for 
building  the  Black  River  and  Genesee  canals  without  any  means 
of  paying  the  debt  created.  In  1838,  the  Committee  on  Ways 
and  Means  proposed  borrowing  $4,000,000  a  year  for  ten  years. 
This  received  the  Executive  sanction  in  1839,  and  with  the  justifi- 
cation of  his  signature  the  Governor  promulgated  the  following 
rule :  "To  avoid  the  necessity  of  resorting  to  taxation,  however 
small,  the  obvious  and  sound  rule  of  financial  policy  will  be,  to 
adjust  the  loans  of  each  year,  so  that  the  annual  interest  of  the 
whole  debt  may  always  fall  within  the  clear  income  of  the 
state. '^^®  This  was  not  only  a  protest  against  taxation,  but  a 
declaration  in  favor  of  perpetual  debt.  Surplus  tolls  following 
this  rule  became  the  base  of  new  loans,-"  and  the  funded  debt,  by 
1843,  had  been  increased  twenty  millions. ^^  This  meant  ruin  un- 
less some  radical  change  was  adopted.^^  It  was  in  1842  that  the 
change  came.  The  credit  of  the  state  was  at  its  lowest  point  of 
depression ;  three  and  one-half  millions  of  debt  was  due  in  sixty 
days,  and  less  than  $200,000  was  in  the  hands  of  the  Commis- 
sioners of  the  Canal  Fund  and  in  the  treasury.^^ 

On  March  29,  1842,  the  legislature  passed  an  act  ' '  To  provide 
for  paying  the  Debt  and  Preserving  the  Credit  of  the  State'' 
which  suspended  the  public  works,  authorized  a  loan  of  over  five 


[24] 


"Annual  Message,  Lincoln,  C.  Z.,  Messages,  etc.,  vol.  iii.  p.  323. 

*8A  bill  imposing  a  one  mill  tax  was  introduced  in  the  Senate  in  1833,  but  it 
failed  of  passage.     Ihid.,  vol.  iii,  p.  439. 

^'Senate  Document,  No.  96,  (1839),  p.  12.  See  also.  Message  of  Governor 
William  H.  Seward,  1840,  Lincoln,  C.  Z.,  Messages,  etc.,  vol.  iii,  p.  797. 

^  "The  policy  distinctly  avowed  and  adopted  was  that  'every  five  hundred 
thousand  dollars  of  revenue  will  serve  as  a  basis  of  finance  to  sustain  ten  mil- 
lions of  debt.'"     Assembly  Document  No.  242,    (1838),  p.' 18. 

»  "Comptroller's  Report,"  January,  1843,  Assembly  Document,  No.  10,  p.  21. 

'=1825-1838—12  years— debt  increased  $3,570,920;  and  diminished  $5,142,- 
609.  From  1838-1844—7  years— debt  increased  $15,799,431 ;  and  diminished. 
$1,251,607.  Assembly  Document,  No.  236,  (1845),  p.  7.  Six  per  cent  stock, 
which  in  1833  bore  a  premium  of  more  than  20  per  cent.,  was  not  salable  at  a 
discount  of  20  per  cent,  in  1841.  "Comptroller's  Report."  1843,  Assembly  Docu- 
ments, No.  10,  p.  21. 

^  Ibid.,  p.  21. 

[25] 


26 


BULLETIN  OF  THE   UNIVERSITY   OF   WISCONSIN 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


27 


millions  of  dollars  to  pay  the  interest  on  the  canal  debt,  to  sup- 
port the  government,  to  repair  the  canals,  to  pay  the  temporary 
loans  at  the  banks,  etc.  It  also  provided  for  a  state  tax  of  one 
mill  on  a  dollar,  and  pledged  the  proceeds  of  this  together  with 
the  surplus  canal  tolls,  for  the  money  borrowed.-*  This  repre- 
sented almost  a  complete  reversal  of  policy.  Although  it  pro- 
vided for  a  loan,  it  was  done  to  maintain  the  credit  of  the  state, 
and  it  pledged  the  taxing  power  to  support  it.  Taxation  for  pur- 
poses of  internal  improvement  which  had  found  no  *^  advo- 
cates among  the  people,''-^  in  1839,  became  a  dire  necessity  in 
1842  to  save  the  honor  of  the  state.  This  act  of  assurance,  al-^ 
though  it  by  no  means  represented  the  unanimous  sentiment  of 
the  legislature,^^  together  with  the  appointment  of  Mr.  A.  C. 
Flagg  as  Comptroller,  produced  an  almost  instantaneous  effect 
upon  public  credit.^"  It  was  only  a  short  step  from  the  passage 
of  this  act,  in  view  of  the  state  of  public  feeling  on  the  matter  of 
state  debt,  to  the  incorporation  of  restrictive  provisions  in  the 
fundamental  law. 

In  the  legislature  of  1841,  Arphaxed  Loomis  introduced  what 
afterwards  came  to  be  known  as  the  ''People's  Resolution. ' '  It 
read :  "Resolved  that  the  Constitution  of  the  state  be  so  amend- 
ed, that  every  law  authorizing  the  borrowing  of  money,  or  the 
issuing  of  state  stock,  whereby  a  debt  shall  be  created  or  increased 
on  the  credit  of  the  state  shall  specify  the  object  for  which  the 
money  shall  be  appropriated ;  and  that  every  such  law  shall  em- 
brace no  more  than  one  object,  which  shall  be  singly  and  specific- 
ally stated ;  and  that  no  such  law  shall  take  effect  until  it  shall 
be  distinctly  submitted  to  the  people  at  the  next  general  election ; 
and  be  approved  by  the  majority  of  the  votes  cast  for  and  against 
it  at  such  election.  That  all  money  to  be  raised  by  the  authority 
of  such  law  be  applied  to  the  specific  object  stated  in  such  law 
and  to  no  other  purpose  whatever,  except  the  payment  of  the  debt 
thereby  created  or  increased.     This  provision  shall  not  extend  or 


»Ihid.,  p.  23. 

» Message  of  Governor  William  H.  Seward,  1839,  Lincoln,  C.  Z.,  MessageSf 
etc.,  vol.  iii,  796. 

*The  vote  in  the  Assembly  was  50  for  and  27  against.  Those  opposed  were 
Whigs.  Hammond,  J.  D.,  Political  History  of  Political  Parties  in  the  State  of 
New  York.  vol.  iii,  279. 

^  Ibid.,  p.  285. 


apply  to  any  law  to  raise  money  for  the  purpose  of  suppressing 
insurrection,  repelling  hostile  invasion  or  defending  the  state  in 
war."-®  This  resolution  was  introduced  in  the  session  of  1842, 
and  was  discussed  fully  but  failed  of  adoption.  Its  purpose,  how- 
ever, was  not  lost,  for  in  essence  it  later  became  a  part  of  the  con- 
stitution. It  was  concerned  primarily  with  public  control,  and 
did  not  mention  the  amount  of  indebtedness  which  the  state  ought 
to  contract  either  in  the  form  of  direct  borrowing  or  by  lending 
its  credit.  Yet  it  was  looked  upon  as  "visionary  and  danger- 
ously revolutionary  in  its  (their)  character."-^ 

The  "People's  Resolution"  was  passed  during  the  legislative 
session  of  1844.  In  the  same  session,  an  amendment  to  the  con- 
stitution was  also  passed  which  embodied  the  principles  of  the 
Act  of  1842,  limited  the  aggregate  indebtedness  in  any  one  year 
to  one  million  dollars,  without  a  vote  of  the  people,  and  provided 
for  the  creation  of  a  sinking  fund  and  the  payment  of  all  debt 
both  principal  and  interest  to  be  contracted  in  the  future  within 
a  period  of  eighteen  years.  The  amendment  was  rejected  by  the 
Whig  vote  in  the  session  of  1845,  so  as  to  necessitate  the  calling 
of  a  constitutional  convention.^**  The  main  reason,  therefore,  for 
calling  the  convention — "The  single  cause — was  the  improvi- 
dence on  the  part  of  the  legislature  in  contracting  debts  on  behalf 
of  the  state.  "^^ 

The  provisions  adopted  on  the  subject  of  state  debt  may  be 
summarized  as  follows : 

Art.  VII,  sec.  9.     Forbade  the  loaning  of  the  State's  credit. 

Art.  VII,  sec.  10.  Allowed  a  debt  of  $1,000,000  in  the  aggre- 
gate for  "casual  deficits  or  failures  in  revenue"  or  for  "expenses 
not  provided  for." 

Art.  VII,  sec.  11.  Placed  no  limit  on  the  amount  of  debt  that 
could  be  contracted  to  repel  invasion,  etc. 


*  Quoted  in  Hammond,  J.  D.  History  of  Political  Parties  in  the  State  of  New 
York,  vol.  iii,  p.  287. 

*»  Ihid.,  p.  287. 

^Ibid.,  pp.  540-544. 

^  The  Democratic  Review,  vol.  xviii,  p.  403.  Other  considerations  also  prompt- 
ed the  calling  of  the  convention,  but  with  them  we  are  not  concerned.  It  la 
worthy  of  note  that  it  was  constantly  the  Democrats  or  Radical  Democrats 
who  supported  the  limitations.  See  Hammond,  J.  D.,  History  of  Political  Par- 
ties in  the  State  of  New  York,  vol.  ill,  p.  388. 


v1 


I 


[26] 


[27] 


28 


BULLETIN  OF  THE  UNIVERSITY   OF   WISCONSIN 


Art.  VII,  sec.  12.  Provided  that  no  debt  except  that  allowed 
in  sections  10  and  11,  was  to  be  authorized  except  by  law  for  some 
single  work  or  object  distinctly  specified  in  the  law.  For  loans 
so  made,  a  direct  tax  was  to  be  levied  to  pay  the  principal  and  in- 
terest within  eighteen  years,  and  all  such  amounts  were  to  re- 
ceive a  majority  popular  vote. 

Such  in  brief  is  the  historical  background  of  New  York's  con- 
stitutional debt  limit.  It  was  made  when  the  debt  of  the  state 
was  more  than  twenty-eight  millions  of  dollars,  when  the  annual 
interest  charge  was  more  than  one  million  four  hundred  thousand 
dollars,  and  when  the  ordinary  expenses  of  the  government  were 
**anually  met  by  loans  in  effect,  if  not  in  fact,  borrowed  in  each 
subsequent  year  to  pay  the  interest  upon  the  debt  which  the  ne- 
cessities of  the  previous  year  accumulated."^^ 

The  time  was  ripe  for  a  change  not  only  in  New  York  but  in 
other  states  which  were  deeply  indebted.  Not  only  was  opinion 
focussed  upon  the  size  of  the  debt,  but  upon  the  incidence  of  the 
expenditure.  The  propriety  of  lending  the  state's  credit  to  pri- 
vate corporations  had  come  to  be  seriously  questioned.  Private 
aid  was  generally  solicited  under  the  plausible  pretence  of  de- 
veloping the  resources  of  the  states,  and  many  of  the  improve- 
ments, indirectly,  at  least,  did  redound  to  public  benefit.  But 
this  was  in  many  respects  a  questionable  use  of  the  taxing  power 
and  such  use  was  criticized  on  the  ground  that  the  proper  func- 
tions of  government  were  violated  thereby,^^  and  public  funds 
used  for  private  purposes. 

But  the  sentiment  which  so  strongly  favored  restrictions  on 
public  debt  in  the  early  forties  was  by  no  means  universal  in 
1838.  The  debates  in  the  constitutional  convention  of  Pennsyl- 
vania make  this  very  clear.  Pennsylvania  began  her  active  in- 
ternal improvement  era  in  1826,  and  fully  discontinued  it  by  the 
sale  of  her  improvements  during  1857  and  1858,  although  the 
movement  for  sale  started  during  the  financial  embarrassment  of 
1839  to  1844.  By  1857  the  Governor  could  say,  '*  Every  consid- 
eration of  public  and  private  interest  requires  the  separation  of 


"Governor's  Message,  1846,  Assemhhj  Document,  No,  3,  p.  25. 
» "Report   of   the   Comptroller   of    New   York,"    (1843),   Assembly  Document 
No.  10,  pp.  33-34. 

[28] 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 

the  State  from  the  management  and  control  of  these  works."" 
How  different  is  this  from  the  sentiment  expressed  in  the  Consti- 
tutional Convention  of  1838,  when  the  proposal  to  limit  the  state 
debt  to  $30,000,000,  except  in  time  of  war,  was  called  **  prepos- 
terous"; when  a  state  debt  was  called  a  ** blessing";  and  when  it 
was  hoped  that  even  the  proposal  to  limit  the  debt  at  all  would 
quickly  be  quieted,  so  that  the  legislature  would  not  think  that 
the  convention  wished  to  commit  any  such  ''suicidal  act."  To 
speak  of  the  state  debt  as  ''debt"  was  a  misnomer;  it  was  "capi- 
tal in  business" ;  "a  weight  permanently  neutralized" ;  a  debt  of 
$30,000,000  was  held  to  be  a  mere  bagtelle  when  compared  with 
the  wealth  of  the  state.  Yet  by  1857,  when  the  state  had  im- 
mensely increased  in  value,  and  the  state  works  had  been  dis- 
posed of,  an  amendment  to  the  constitution  fixed  the  limit  at 
$750,000— $30,000,000  had  shrunk  to  $750,000  in  the  short  period 

of  twenty  years. 

Public  sentiment  in  Pennsylvania  until  about  1840  was  clearly 
in  sympathy  with  the  internal  improvement  policy.  Pennsyl- 
vania, like  New  York,  had  founded  her  hopes  on  the  revenue  to 
arise  from  improvements.  She,  like  New  York,  had  computed 
her  debts  in  terms  of  state  solvency.  Neither  of  them 
had  stopped  to  realize  that  credit  in  the  last  instance,  in  case  of 
the  failure  of  their  industrial  ventures,  rested  upon  the  willing- 
ness of  the  people  to  be  taxed.  And  taxes  were  just  what  the 
people  were  unwilling  to  endure.  New  York  deferred  taxation 
until  she  wr.s  forced  either  to  tax  herself  or  repudiate  her  debt. 
Pennsylvania,  like  New  York,  when  she  began  her  works  estab- 
lished an  Internal  Improvement  Fund,  but  this  was  indequate.'* 
Likewise,  she  imposed  a  state  tax  in  1831,  but  this  furnished  little 
revenue^®  and  was  repealed  by  the  Act  of  February  8,  1836, 
which  chartered  the  United  States  Bank  of  Pennsylvania,  and 


•*  "Message  to  the  Legislature,"  1857,  p.  8. 

"This  fund  was  to  be  supplied  by  certain  auction  duties,  escheats,  divi- 
dends on  canal,  road  and  bridge  stock.  The  revenues  could  not  amount  to  more 
than  $60,000  per  year— the  interest  on  a  debt  of  $1,200,000.  Between  1826 
and  1842,  the  Commissioners  of  the  Internal  Improvement  Fund  expended 
$53,352,648.     Bishop,  A.  L.,  The  State  Works  of  Pennsylvania,  p.  209. 

"During  the  five  years  of  Its  existence  1831-36,  It  yielded  but  $1,052,650 — 
an  amount  slightly  less  than  the  Interest  on  the  Internal  Improvement  debt  la 
1835.     Ibid,,  p.  212. 

[29] 


■ 


30 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


31 


1  i 


extended  the  internal  improvement  works — a  law  which  **  com- 
prised three  projects  in  an  obvious  log-rolling  combination." 
Taxation  was  asked  for  by  the  State  Treasurer  in  1838,  but  the 
request  was  ignored.  In  1840  a  small  tax  was  levied,  but  it  was 
not  until  1844  that  a  permanent  tax  policy  was  adopted  and  the 
returns  from  the  tax  irrevocably  pledged  to  pay  the  interest  on 
the  public  debt.  This  law  was  made  irrepealable.  But  direct 
taxation  for  improvements  was  no  more  favorable  to  Pennsyl- 
vania than  it  had  been  to  New  York,  and  the  agitation  for  such 
works  rapidly  subsided.  State  debt  had  now  become  a  reality 
and  was  calculated  not  with  respect  to  the  wealth  of  the  state, 
but  to  the  part  of  this  wealth  which  the  people  were  willing  to 
pay  as  taxes. 

From  direct  taxation  to  constitutional  limitation  on  state  debt 
was  but  a  short  step,  and  this  was  taken  in  1857  by  an  amend- 
ment which  limited  the  debt  to  supply  casual  deficits  to  $750,- 
000,  allowed  the  state  to  borrow  without  limit  to  repeal  invasion, 
or  suppress  insurrection,  but  prohibited  all  further  debt  entirely. 
The  state  was  forbidden  to  lend  its  credit  to  or  become  a  stock- 
holder in  any  corporation,  and  was  required  to  establish  a  sink- 
ing fund  so  as  to  reduce  the  state  debt  by  at  least  $250,000  an- 
nually.^^ 

It  is  not  necessary  nor  is  it  our  purpose  to  relate  the  experience 
of  the  other  internal  improvement  states,  and  the  steps  which 
finally  led  to  constitutional  restriction  on  their  indebtedness. 
Suffice  it  to  say  that  the  experience  of  all  of  them  was  far  from 
reassuring  and  greatly  influenced  the  policies  of  those  that  came 
afterward. 

The  first  necessity  in  industrial  development  was  adequate 
transportation  facilities ;  the  second  was  sufficient  capital  to  de- 
velop the  same.  Some  of  the  states  dug  their  own  canals,  built 
their  own  railroads  and  established  their  own  banks.  Others 
gave  their  support  to  private  companies  which  did  the  work  for 
them.  All  were  affected  by  the  mania  of  speculation  of  1836  to 
1840 ;  some  were  able  to  Weather  the  financial  storm  of  1837  and 
following,  by  systems  of  taxation  or  otherwise,  while  still  others 


"  state  Constitution   of  Pennsylvania,  1838,  as  amended  in   1857,  Art.  XI^ 
Sections  1,  2,  3,  4,  5. 

[30]    , 


like  Michigan  and  Louisiana  did  not  rise  above  repudiation. 
After  the  storm  and  stress  had  subsided,  after  railroads  had 
proved  themselves  superior  means  of  transportation,  after  the 
corporate  form  of  industry  had  become  developed  and  special 
charter  legislation  given  away  to  general  charters ;  after  reforms 
were  secured  in  banking  legislation  and  bank  supervision 
strengthened,  the  states  emerged  crippled  and  torn,  as  it  were, 
by  the  ravishes  of  excess,  bearing  in  their  constitutions  debt  re- 
strictions so  rigid  as  to  make  almost  impossible  a  duplication  of 
their  former  experience.  These  restrictions  in  the  light  of  ex- 
perience were  almost  universally  adopted  by  the  new  states,  and 
have  been  copied  down  into  our  own  day.  Let  us  look  at  the 
nature  of  them  in  some  detail. 


[31] 


22 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


33 


ill 


>  iiii 


CHAPTER  3 

THE  NATURE  AND  SIGNIFICANCE  OF  THE  CONSTITU- 
TIONAL RESTRICTIONS  ON  STATE  INDEBTEDNESS 

The  main  features  of  the  constitutional  restrictions  on  state 
indebtedness  may  be  grouped  under  the  following  general  head- 
ings: (1)  The  amount  of  money  which  may  be  borrowed  for 
** casual  deficits"  in  revenue,  for  ''delays,"  for  ''extraordinary*' 
purposes  or  for  "purposes  not  provided  for."  The  amounts  for 
these  purposes  can  ordinarily  be  borrowed  without  any  special 
legislative  or  popular  approval.  (2)  The  amounts  allowed  for 
suppressing  insurrection,  repelling  invasion,  and  protecting  the 
state  in  time  of  war.  There  is,  as  a  rule,  no  limit  placed  upon 
these  amounts.  (3)  Certain  other  sums,  either  specified  or  un- 
specified. When  named,  they,  in  most  cases,  agree  with  the 
amounts  allowed  for  casual  deficits,  etc.,  and  may  be  borrowed 
only  under  definite  laws,  for  purposes  specified  in  the  law  and 
only  after  they  have  received  either  legislative  or  popular  ap- 
proval or  both.  Most  generally  the  laws  authorizing  such  loans 
must  provide  for  a  direct  annual  tax  to  pay  the  interest  as  it  ac- 
crues  and  the  principal  within  a  certain  number  of  years. 
Oftentimes  the  amounts  allowed  with  such  approval  are  likewise 
limited.  (4)  Legislatures  are,  as  a  rule,  prohibited  from  assum- 
ing any  private  or  public  debt ;  from  lending  their  credit  to  pri- 
vate corporations,  from  contracting  any  debt  for  internal  im- 
provements, and  from  becoming  stockholders  in  private  corpora- 
tions. With  this  general  statement  let  us  look  at  some  of  the  re- 
strictions more  in  detail,  as  well  as  the  time  in  the  history  of  the 
states  when  they  were  made. 

There  were  no  constitutional  restrictions  upon  the  states'  bor- 
rowing power  before  1842.  In  this  year  Rhode  Island  imposed 
the  qualifications  spoken  of  in  the  preceding  chapter.  She  was 
quickly  followed  by  New  Jersey,  in  1844,  while  the  latter  was  an- 

[32] 


ticipated  slightly  by  Michigan,  which,  by  a  constitutional  amend- 
ment in  1843,  required  all  loans  on  the  credit  of  the  state,  except 
those  for  raising  money  for  the  actual  expenses  of  the  legislature, 
judiciary,  and  state  officers,  as  well  as  all  amounts  for  repelling 
invasion,  etc.,  to  be  accepted  by  a  majority  vote  at  a  general  elec- 
tion.   This  measure  was  to  safeguard  the  use  of  state  credit,  and 
came  only  after  "the  funds  of  the  state  had  (have)  to  a  great 
extent  been  injudiciously  applied,  and  in  many  instances,  squan- 
dered with  wanton  profligacy.     .     .     .     ,"i  and  after  the  cor- 
porations  to  which  the  state  had  lent  its  credit  had  in  "nearly 
every  instance  failed  to  pay  accruing  interest  and  were  (are)  in 
default.  "2    Nothing  concerning  the  latter  subject  was  said  in 
the  amendment  and  it  was  not  until  1850  that  the  state  was  pro- 
hibited from  lending  its  credit.    Louisiana,  in  her  constitution 
of  1845,3  limited  the  aggregate  state  debt  which  could  be  con- 
tracted to  $100,000,  without  at  the  same  time  levying  a  direct 
tax  to  pay  the  interest  and  principal  at  "maturity,"*  New  York 
imposed  her  restrictions,  as  noted  above,  in  1846,  L  did  also  the 
new  state  of  Iowa  which  entered  the  Union  in  that  year.    The 
former  fixed  the  maximum  debt  without  popular  approval  at  one 
miUion  dollars  and  forbade  the  state  to  lend  its  credit  to  any  pri- 
vate individual,  corporation,  or  association ;  while  the  latter  fixed 
the  maximum  debt  without  popular  approval,  at  one  hundred 
thousand  dollars,  and  forbade  the  state  from  ever  becoming  a 
stockholder  in  any  private  company,  corporation,  or  association  » 
Wisconsin  and  Illinois,  in  1848,   limited  their  respective  state 
debts  to  $100,000  and  $50,000;  the  former  required  the  approval 
of  a  majority  of  all  members  elected  to  each  house  for  anything 
above  this  amount,  while  the  latter  required  for  anything  addi- 
tional  the  consent  of  a  majority  of  all  votes  cast  for  members 
of  the  general  assembly  making  the  loan.    Both   of   them   re- 
stricted the  state 's  power  to  subsidize  private  capital. 

No.'f8,^p''%i'  ^<^°^°»"tee  on  the  Governor's  Message."  1842.  House  Document 

'I?.??"?'^  Messasre."  1842,   Joint  Documents,  No.  2,  p.  29. 
Articles  113,  114,  121.  •*'*'• 

"when'due.'' "*""''''  '^  ^^^^'  ^^^^'     ^^^  Constitution  of  1868  changed  this  to 

tlo^r^'^  '^^^""^^^  constitution  of  1844  contained  practically  the  same  provL 

[33] 


34 


BL'LLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


35 


other  states,  either  when  entering  the  union  -  -J^^'^  ^^'J^ 
their  constitutions,  have  followed  the  examples  -t  them  m  th« 
early  period,  so  that  at  the  present  time  not  only  the  or  gmal  m 
Si  Sprovement  states  hut  the  others  as  well,  a  most  without 
Spti"  have  rigidly  circumscribed  the  POwers  of  the  Jates^o 

creaie  debt.  The  arguments  used  in  ^^^f  "^^^^^^^  ^'f  f? '"jf 
forties  against  state  debt  were  repeated  during  the  fifties,  etc., 
and  are  uid  in  our  own  day.»  Constitutional  restrictions  are 
the  rule  in  the  United  States  and  it  remains  only  to  point  out 
ome^f  Z  changes  that  have  been  made  in  the  later  joos^- 
lions  which  tend  to  show  either  a  more  or  a  less  strict  adherence 

"-Z  ::rtt1estrictions  in  a  few  states  have  been  su^^ 
ciently  treated  for  our  purposes  in  the  preceding  chapter.    They 

cluld  be  explained  fully  only  by  a  f  f -i;-^;:„^X*  ^^^^^^^^ 
nf  internal  improvement  schemes,  of  the  effect  of  the  philosopny 
0  Se  p'LdTf  westward  expansion,  etc.,  etc.  This  fuller  analy- 
;i  woJld  take  us  too  far  from  our  thesis,  which  is  concerned 
rather  with  showing  the  general  causes  whfeh  P'^^ueed  *e^^ 
strictions,  the  effect  of  these  upon  the  position  of  the  states  as 
Sitriai  units,  and  of  their  legitimacy  or  illegitimacy  from  the 
standpoint  of  public  finance  and  present  political  philosophy. 

One  common  characteristic  of  debt  limitations  is  the  require- 
ment  that  all  loans  above  a  certain  minimum  must  receive  a  vote 
of  popular  approval.  These  requirements  being  almost  unani- 
mous among  the  early  constitutions  no  doubt  give  evidence  of  the 
general  distrust  that  was  felt  for  legislative  bodies '  During 
the  forties,  Michigan,  Rhode  Island,  New  York,  New  Jersey, 
Iowa  Illinois,  and  California  required  popular  votes  ranging 
from'  a  majority  to  two-thirds;  while  Louisiana  required 
no  vote  at  all,  and  Wisconsin  a  legislative  majority.  In 
four  states.  New  Hampshire,  Vermont,  Connecticut,  and  Massa- 
chusetts, there  are  no  constitutional  restrictions  at  all  on  state 

.ywa,  for  instanc  the  "Debate.  In  *he  Constitutional  Conven«on  of  mah" 
Proceeding  of  the  Constitutional  Convention,  189o,  vol.  11,  »»•  "^J' ",„  „-.,. 

m/e  Tesolutiou  at  a  meeting  at  Albany.  New  York   Nov.  21,  If"' '"  «!?■. 
y,««,  «es"  "  Political  Parnea  <»  the  State  ot  New  York.  vol.  Hi,  p.  388 , 

retoV?M^l."/^«    ri839.  Z.oe„.e„*  NO.  3    P    5.  nH«^ 
ReporU,  1839-40;  Constitutional  Debates  o/  Iowa,  1857,  vol.  1,  PP.  ^bo.  '=<>'.'" 

[34]     . 


debt;  while  in  quite  a  number,  the  amounts  that  can  be  borrowed 
for  temporary  or  extraordinary  purposes  are  not  limited.  Ex- 
amples of  the  latter  are  Delaware,  1897 ;  Indiana,  1851 ;  North 
Carolina,  1876 ;  South  Carolina,  1895,  etc. 

As  a  general  rule  there  are  no  limitations  at  all  upon  the 
amount  of  money  that  can  be  borrowed  to  repel  invasion,  sup- 
press  insurrection,  etc.  There  are  some  exceptions,  however. 
Alabama,  in  her  constitutions  of  1875  and  of  1901,  requires  a 
two-thirds  legislative  vote  for  the  making  of  such  loans,  while 
Arkansas,  in  her  constitution  of  1874,  makes  no  provisions  at  aU 
for  such  debts.  The  same  is  true  of  the  Florida  constitutions  of 
1865,  1868,  and  1875.  In  her  last  constitution  (1885),  Florida 
is  allowed  to  borrow  only  for  refunding  her  debt  and  repelling 
invasion.  The  last  constitutions  of  Missouri  (1875)  of  South 
Carohna  (1895)  and  of  Tennessee  (1870),  however,  make  no  pro- 
visions for  loans  to  suppress  insurrections,  etc. 

The  amounts  which  may  be  borrowed  for  casual  deficits  or  tem- 
porary purposes  vary  considerably  among  the  different  states, 
but  show  httle  variation  as  between  the  different  constitutions  of 
the  same  state.  Table  "A"  below  indicates  the  chief  facts  con- 
cerning the  amounts  allowed  for  this  purpose  by  states,  by  year 
groups,  for  constitutional  changes,  as  well  as  the  date  of  the  last 
constitution  for  each  state. 

iJ^Sl'I"  ^''"'  *•"'  '*^*''  ^""^  ^^*««  "f  t^""-  constitutions 
in  which  there  are  no  limits  on  the  amounts  which  may  be  bo^ 

all  for  such  loans,  and  where  other  than  fixed  amounts  are  al- 


[35] 


36 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


37 


TABLE  A 

AMOUNTS  OF  TEMPORARY  LOANS  ALLOWED   FOR  STATES  BY  DATES  OF  CON- 

STITUTIONS.    (OOO's  omitted.) 


States. 
<j(Latest  constitutions) 

Constitutions, 
1800  to  1859. 

Constitutions, 
1860  to  1869. 

Consti- 
tutions, 
1870   to 
1879. 

Constitu- 
tions. 1880 
to  1889. 

Consti- 
tutions. 
1890  td 
1899. 

Constl. 
tutiong 

1900  to 
1909. 

$300 

**366(»j" 

Alabama,  1901 

$100 

"■366(3» 
100  (*) 

Arkansas.  1874 

(»).... 



Callfornia.1908  (i) 

$300  (3) 

Colorado,  1876 

(») 

Dele  ware,  1897 

Oeorgria,  1877 

Tr)fthr>    1KKQ 

200 

xUsUO,  X8O0 

Illinois,  1870 

50 
(') 

250 

li%  (3)  of 

assessed 

value 

Indiana,  1851 

Iowa,  1857 

100  to  250 
100  (1855) («) 
500  (1857) (») 
100  (1858) (») 
1.000  (1859) (») 
500 

100  (1845)  (») 
100  (1852) (3) 
300  (3) 
50 
50 
250  (») 

Kentucky,  1890 

$500 

Louisiana.  1898 

$166  0864) (') 
100  (1868) (3) 

"56  (1864)""' 

Maine,  1819  (») 

300  (3) 

Maryland,  1867 

Michifiran,  1908 

"256 

Minnesota.  1857  (0 

Missouri,  1875 

250 

Montana,  iXstf 

Nebraska  1875 

■"56*(8) 

300  (3) 

"ioo"'" 

i66(») 

Nevada.  1864 

New  Jersey.  1844 

100  (») 
1.000 

New  York,  1894 

$1,000 

North  Carolina,  1876 

(«) 

....(«)... 

North  Dakota,  1889 

200(5) 

Ohio,  1851 

750  (•) 

Oklahoma,  1907 

400  (•) 

OreiTon,  1857 

50  (») 

750  («) 

50  (') 

Pennsylvania,  1873 

1.000 

Rhode  Island,  1842 

South  Carolina,  1895 

(3) 

South  Dakota,  1889 

lOOD. 

. • . V    /• . ■ . 

Texas.  1876 

100   (3) 

200 

•  «  •     •••••• 

Utah,  1895 

200 

.......... 

•  •  ■  V  /#■•• 

Virsrinia.  1902 

(») 

(2) 

'""466 

Washinerton,  1889 

West  Virginia.  1872 

(») 

...(') 

Wisconsin,  1848 

100  (*) 

Wyoming,  1889 

1%  of 
assessed 
value. 

(0  Amendment. 
(')  Amount  not  limited. 
(3)  Not  mentioned  as  such. 
{*)  As  a  maximum. 
(')  Extraordinary  expenditure. 
(•)  Or  other  expenditures  not  provided  for. 
O  For  extraordinary  expenditure  or  public  improvements 


[36] 


TABLE  B 

SHOWING  THE  CHANGES  MADE  IN  THE  VARIOUS  STATE  CONSTITUTIONS  IN" 

THE  MATTER  OF  TEMPORARY  LOANS. 
(OOO's  omitted.) 


States.    (Latest 
constitutions.) 

Constitu- 
tions, 
befwre 
1860. 
$ 

Constitu- 
tions, 
1860   to 
1869. 
$ 

Constitu- 
tions, 
1870   to 
1879. 
$ 

Constitu- 
tions, 
1880  to 
1889. 
$ 

Constitu- 

liong, 

1890   to 

1899. 

$ 

Constitu- 
tions, 
1900   to 
1909. 
$ 

Alabama    1901 

100 
250 

300 

Illinois,  1870 

Iowa  1857 

56'*" 

(100  to  250) 
(100  to 
1,000) 
50 
50 
750 

Kansas,  1859 

Michigan,  1908.... 
Nebraska  1875.... 

Penn.,  1873 

Tpyii<«    1S76 

250 

100 

1.000 
200 

100 

TABLE  6 


No  limit 


State  Date  of  Const. 

Delaware 1897 

Indiana 1851 

Worth  Carolina 1876 

South  Carolina 1895 

Virginia 1902 

West  Virginia 1872 


No  provision 


State  Date  of  Con»t. 

Arkansas 1874 

Florida 1885 

Louisiana 1898 

Mississippi 1890 


Other  than  fixed  amounts 


State  Date  of  Const 

Colorado 1871 

Idaho 1889 

Wyoming 188» 


From  Table  ''A"  it  is  seen  that  the  amounts  allowed  for  tem- 
porary loans  vary  from  $50,000  in  Oregon,  for  instance,  to 
$1,000,000  in  the  states  of  Kansas,  Pennsylvania,  and  New  York. 
These  amounts  seem  to  have  been  chosen  according  to  two  main 
considerations :  first,  a  comparison  more  or  less  haphazardly  mad& 
with  the  amounts  allowed  in  other  states,  and  second,  a  compari- 
son of  the  amounts  which  would  be  added  to  the  already  existing^ 
debts  in  each  case.  The  prevailing  tendency  was  to  reduce  bor- 
rowing to  a  minimum.  To  illustrate :  The  chairman  of  the  com- 
mittee having  this  matter  in  hand  in  the  constitutional  conven- 
tion of  Iowa,  1857,  said,  respecting  the  $100,000  proposed  for 
deficits,  ''We  could  not  see  any  real  necessity  for  the  state  incurr- 
ing any  debt  at  all,  but  in  order  to  prescribe  some  limit,  we  con- 
cluded to  settle  on  the  amount  named  in  the  section. ' '®    Mr.  Gil- 


*  Constitutional  Debates  of  lotca,  1857,  vol.  i,  p.  261. 

[37] 


( 


n 


BULLETIN  OF  THE  UMVERSITr  OF  WISCONSIN 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


39 


laspy  replied  that  the  legislature  would  borrow  to  the  full  amount 
allowed  so  that  the  safest  move  was  to  put  the  limit  low »  Some 
were  in  favor  of  prohibiting  all  debt.">  The  amount  finaUy  de- 
cided upon  was  $250,000-it  had  been  $100,000  in  the  constitu- 
tion of  1846— and  it  was  accepted  by  a  vote  of  16  to  11 "  In  the 
Kentucky  convention,  1849,  the  amount  thought  desirable  for  cas- 

*Sn  nnn'*'  "^""^  ^'"'^  ^^^'^'^^  *°  ^^00,000.  Some  looked  upon 
$500,000  as  a  mere  pittanee-an  amount  which  would  hardly 
clean  the  streets  of  New  York  City  for  a  year,"  yet  this  amount 
was  accepted  by  a  vote  of  62  to  31."  Temporary  loans  are  gen- 
erally justified  on  the  ground  that  income  and  outgo  of  public 
funds  never  exactly  offset  each  other,  and  that  it  is  better  to  an- 
ticipate^ taxes  by  loans  than  to  constantly  tamper  with  the  tax 
rate.  But  one  is  rather  inclined  to  believe  that  the  amounts 
were  allowed  more  often  as  a  partial  conce^ion  te  the  demands 
for  state  activity,  which  could  not  altogether  be  crushed  out.  than 

^d  of  a  tax  for  every  loan  m  excess  of  a  minimum  operated  in 
most  cases  as  an  effective  check  upon  undue  borrowing,  and  it 
was  felt  that  some  margin  was  not  only  desirable  but  Lessary 
Interest  payments  on  the  outstanding  debt  were  large,  and  ti' 

tar  distant     Taxation  was  a  surer  and  safer,  but  not  always  a 
more  popular  means  of  satisfying  both  of  thes;  demands       "^ 

Ordinarily,  no  set  duration  is  fixed  in  the  constitutions  for  tem- 
W  loans.    There  are  some  exceptions,  however,  to  thJrl 
Missouri,  in  her  constitution  of  1875,  allows  $250,0^0  to  heZ- 

Zod  T^  '"^  """''  ^'''■'  '"*  ''''  ^"^'^  '^'^^^  ^  for  a  longer 

shall  be  paid     when  due,"  while  Minnesota  allows  them  to  run 

ttenTe  d     T™.  "'^  '""""*'*^  "^'^^  ^  disti^Tti  n  be 
tween  the  duration  of  temporary  and  of  other  loans,  but  fixes 

the  maximum  period  at  five  years.    Colorado  aUows  them  to  run 
ten  to  fifteen  years,  and  Nebraska  thirty  years. 

•llHd.,  p.  261. 

n  ^ZTpTtT'  ""''"'''  "^  ^'^"'  ''""'  ^^^-  1'  271. 

"fit  ?sl  ''""'"^'^^^  ''  '"^  ''^'^  ^--««-  Of  Kentuclcy^  1849,  p.  782. 

[38] 


With  respect  to  loans  accepted  by  the  legislature  or  by  popular 
vote  or  by  both,  there  are  generally  no  limitations  on  the  amounts 
that  may  be  borrowed.  Maryland,  however,  is  an  exception. 
She  fixes  the  aggregate  debt  possible  at  $100,000.  Louisiana,  in 
her  constitutions  of  1879  and  1898,  allows  no  borrowing  at^  aU 
over  that  necessary  to  repel  invasion  or  to  suppress  insurrection. 
Ohio  also  fixes  a  maximum :  nothing  at  all  above  $750,000.  The 
chief  facts  in  respect  to  the  duration  of  the  permanent  debts  al- 
lowed  in  the  different  states  are  collected  in  the  following  tabular 
statement—* '  D '  '—which  shows  these  data  according  to  the  last 
constitutions,  with  the  relative  position  of  the  states,  etc. 

TABLE  D 
SHOWING  THE   PERIODS  WHICH  STATE    IX)ANS  MAT  RUN.    THE   RELATIVE 
POSITIONS  WHICH  THE  STATES  HOLD.  AND  THE  DISTRIBUTION  OP  THE 
PEBIODS  BY  YEAR  GROUPS. 


State. 


^♦Amendment. 


"Amendment. 


California  »* 

Colorado 

Idaho 

Iowa 

Kansas 

Kentuck.v... 
Maryland.... 
Minnesota... 

Missouri 

Nevada 


Date  of 
constitution , 


1908 

1876 
1889 
1857 
1859 
1890 
1867 
18o8 
1875 
1864 


Duration. 


1 1 


75    years 
10-15    " 
20 
20 

'w&en  due" 
20    yean 
15 
10 

n 

20 


Relative 
position. 


1 

9 

7 
7 


5 

8 
11 

10 

7 


State 

Date  of 
constitution. 

Duration 

Relative 
position. 

Distribution 

by  year 

groups. 

N^w  Jersev 

1844 
1905 
1889 
1907 
1895 
1889 
188^ 
1872 
1848 

35    years 
50 
30 
25 
40 
•Vhen  due" 
20 
20 
20 

4 
2 
5 

6 
3 

Yr.          No. 
5-  9              1 

N«w  York  '*  

10-14             S 

North  Carolina 

15-19             1 

Oklahomfti •.••••••••• 

I  20-24             5 

Soutli  Carolina 

25-29             1 

fir^iifVi  Tlab-nto. 

30-34             2 

Washino^ton    

7 

7 

12 

35-39              1 

Vlrsrinia    West 

40-44              1 

Wisconsin  

50-54              1 

55  and  over  1 
••wlien  due"  2 

Total        19 

[39] 


I 


40 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


41 


«j 


These  data  show  little  uniformity  among  the  various  states  as 
respects  duration  of  permanent  debt.     Moreover,  the  periods  are 
maxima  and  apply  to  all  loans  irrespective  of  the  purposes  for 
which  the  money   is    borrowed.     California   has   changed   the 
period  from  twenty  to  seventy-five  years,  New  York,  from  eigh- 
teen to  fifty  years,  and  South  Carolina,  from  twenty  to  forty 
years.     Otherwise,  the  periods  specified  in  the  different  constitu- 
tions have  remained  the  same.     This  tendency  to  defer  the  time 
of  payment,  although  not  marked  nor  general,  is  significant  when 
the  purposes  for  which  states  borrow  are  taken  into  considera- 
tion.   All  of  the  outstanding  debts  of  Alabama,   Florida    and 
Kansas  in  1908  were  for  refunding  purposes.    A  large  percent- 
age of  that  for  the  other  states  is  of  this  general  type  and  repre- 
sents old  loans  which  have  been  pushed  on  into  the  future  rather 
than  having  been  paid.^® 

The  constitutions  almost  as  a  unit  prohibit  the  states  from 
lending  their  credit  to  and  becoming  stockholders  in  private  cor- 
porations. These  practices  were  engaged  in  from  early  times 
particularly  by  the  internal  improvement  states  and  were  among 
the  chief  causes  for  the  abuses  of  the  period.  Capital  was  scarce 
and  timid,  while  private  credit  was  undeveloped.  It  was  but 
natural  that  aid  should  have  been  given  to  private  undertakings 
in  canal  and  railroad  building,  particularly,  when  public  opinion 
gave  them  a  public  character  and  when  future  economic  welfare 
was  thought  to  depend  upon  them."  But  private  aid,  legitimate 
in  some  cases,  was  abused,  and  nearly  all  of  the  new  constitutions 
of  the  forties  and  fifties  absolutely  prohibited  it.^«  Such  restric- 
tions are,  however,  not  universal,  nor  are  the  prohibitions  against 

"The  following  data  show  for  a  number  of  states,  chosen  at  random  the 
relation  of  the  bonded  debt  for  funding  and  refunding  to  the  total  bonded  debt 
outstanding  1902.  Alabama,  Sept.  13,  1902,  100%;  Florida,  Dec  31  1902 
100%  ;  Idaho,  Dec.  31,  1902,  37.86%  ;  Indiana,  Oct.  31,  1902,  99.73%'-  Ken- 
tucky, June  30.  1962,  61.32%  ;  Maryland,  Sept.  30,  1902,  78.20%  ;  New  York 
Sept.  30,  1902,  0.00%;  Pennsylvania,  Nov.  30,  1902,  96.86%.  Wealth,  Debt 
and   Taxation,  Washington,    1907.     ''Table   69." 

"The   courts   lent   validity   to   this   practice.     Vide,   Sharpless  v.    Mayor  of 
Philadelphia,  21   Penn.  State  147,    (1853). 

"  Rhode  Island  said  nothing  about  the  practice  in  her  constitution  of  1842 
Iowa,  in  1846,  prohibited  stock  subscriptions,  but  said  nothing  about  the  state 
lending  its  credit.     New  Jersey  prohibited  the  lending  of  credit,  but  was  silent 
on  stock  subscription,   etc 

[40] 


becoming  stockholders  so  general  as  are  those  on  lending  credit 
to  private  concerns.^^  Some  of  the  states  have  not  acted  consist- 
ently on  the  matter  of  private  aid.  Kansas  prohibited  the  state 
from  lending  its  credit  in  1858,  and  in  the  following  year  re- 
moved the  restriction.  Louisiana  prohibited  this  in  1864,  al- 
lowed it  in  1868,  and  again  prohibited  it  in  1879.  Much  the  same 
spirit  of  vascillation— of  course  the  result  of  the  pressure  of  poli- 
tics, etc.,  rather  than  an  evidence  of  a  changed  philosophy — is 
also  found  with  respect  to  the  states  becoming  stockholders  in  pri- 
vate concerns. 

The  experience  of  the  internal  improvement  states  has  left  its 
impress  so  deeply  marked  upon  people's  minds  that  even  today 
there  is  little  disposition  to  give  the  modern  wealthy  state  more 
privileges  with  respect  to  the  use  of  credit  than  were  given  to 
those  of  the  forties  and  fifties.  Michigan  is  an  excellent  example 
of  this.  In  her  constitution  of  1908,  the  maximum  debt  allowed 
is  $250,000 :  no  addition  can  be  made  to  this  under  any  considera- 
tion. Not  even  the  protective  devices  of  legislative  or  popular 
approval  can  bring  to  the  state  this  financial  device  which  is  more 
liberally  accorded  to  minor  civil  divisions.  New  Mexico,  in  her 
constitution  of  1911,  prohibits  any  state  debt  by  popular  ap- 
proval or  otherwise,  if  the  existing  debt,  exclusive  of  the  territo- 
rial debt  and  that  of  the  several  counties  assumed  by  the  state,  ex- 
ceeds one  per  cent,  of  the  assessed  value  of  the  property  of  the 
state. 

The  tendency  here  noticed  has  its  exception  in  a  few  states  such 
as  California,  New  York,  Illinois,  etc.  In  California  four  state 
projects,  which  together  will  involve  an  indebtedness  of  about 
$29,000,000  before  completion  were  voted  upon  in  November, 
1910,  and  their  execution  authorized.^*^  In  New  York,  provision 
was  made  in  1911  for  an  issue  of  bonds  not  exceeding  $19,800,000" 
for  furnishing  proper  terminals  and  facilities   for  barge   canal 


"For  details  see  Appendix  I. 

*  Ratified  in  November,  1910,  according  to  the  provisions  of  the  State  Con- 
stitution on  state  debt,  Article  xvi,  as  amended  November  3,  1908.  These 
provisions  are  known  as  the  San  Francisco  Harbor  Improvement  Act,  (Ch.  320, 
Laws,  1911)  ;  The  Highway  Act,  (Ch.  383,  Laws,  1911)  ;  the  India  Basin  Act,. 
(Ch.  407,  Laws,  1911)  ;  and  the  San  Diego  Seawall  Act,  (Ch.  623,  Laws,  1911). 

[41] 


I 


42 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


traffic  ;2i  while  Illinois  has  seen  fit  to  provide  a  $20,000,000  loan 
for  the  development  of  her  water  power  resources. 

These  instances  of  extensive  borrowing  are  clearly  exceptions 
to  the  rule.  Looking  at  the  period  which  has  elapsed  since  the 
day  of  internal  improvements,  one  sees  little  evidence  of  any  dis- 
tinct movement  to  make  debt  restrictions  less  rigid.  Here  and 
there  changes  have  been  made  by  increasing  the  duration  of  loans 
or  the  amounts  that  may  be  borrowed,  or  by  occasional  constitu- 
tional amendments,  but  these  are  relatively  few.  The  checks  im- 
posed remain  effective.  Popular  approval  is  not  only  difficult  to 
get"  but  the  mere  fact  of  its  being  necessary  for  almost  every 
trifle,  has  been  sufficient  to  keep  the  states  well  within  the  con- 
fines of  a  stilted  financial  policy. 

Such  then,  in  the  main  are  the  facts  with  respect  to  the  states' 
power  to  borrow  money.^^     The  restrictions  for  the  most  part 
grew  out  of  a  period  of  intense  speculation,  and  of  general  flux ; 
when  the  country  was  not  only  taking  on  nationality  by  an  in- 
creasing population  and  industrial  development,  but  when  indus- 
try was  seeking  markets,  financial  and  industrial  concerns  look- 
ing for  immediate  and  enormous  profits ;  when  capital  was  scarce 
and  private  credit  undeveloped ;  when  state  policies  were  indefi- 
nite and  administrative^*  and  financial  control  weak  and  unor- 
ganized, and  when  the  future  was  discounted  hardly  more  than 
the  present.     Such  an  atmosphere  and  an  environment  were  con- 
ducive to  excess,  and  with  financial  mismanagement,  political  log- 
rolling, and  downright  fraud  state  projects  generally  resulted  in 
catastrophe.    It  was  out  of  this  experience  that  restrictions  of 

"Chapter  476,  Laws  1911.  This  law  was  ratified  by  the  people  in  Novem- 
ber. 1911,  by  a  vote  of  315,932  to  311,516. 

^Vide,  Dodd,  W.  F.,  Revision  and  Amendment  of  State  Constitutions,  for  a 
list  of  recently  adopted  and  rejected  amendments  relating  to  state  and  local 
-debt. 

»  The  details  with  article  and  section  references  are  given  in  Appendix  II 
••Governor  of  Alabama,    Message,   January  24,  1871.     In  speaking  of  loans 
made  to  private  corporations,  he  said  he  did  not  know  "to  what  extent  bonds 
under   the   various    statutes    have    been    endorsed   and    issued    by    the    state 
Neither  in  the  executive  offices  nor  in  any  other  ofBce  of  the  government    can 
be  found  a  record  of  the  action  of  the  executive  in  this  regard  i 

cannot  even  suppose  the  number  of  bonds  endorsed  to  any  company,  the  time 
when  and  where  payable,  or  whether  endorsed  or  issued  according  to  law  " 
Quoted  by  Martin  W.  E.,  "Internal  Improvements  in  Alabama,"  Johns  Hopkins 
Vmversxty  Studies,  vol.  xx,  p.  83.  w/"**"* 

[42] 


SECRIST-RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


43 


debt  took  shape.  Legislatures  came  to  be  questioned  and  state 
policy  scrutinized.  The  sentiment  once  so  strong  in  favor  of  state 
activity  reacted  upon  itself,  only  to  give  private  and  corporate  ac- 
tivity a  new  lease  of  life.^^  Many  of  the  restrictions,  necessary 
at  the  time  they  were  imposed,  seem  today  wholly  out  of  accord 
with  modern  conditions.  Such  amounts  of  debt  as  $1,000,000  to 
New  York,  or  $50,000  to  Illinois  for  temporary  purposes,  in  1846 
and  1848,  respectively,  when  the  states  were  almost  at  the  point 
of  bankruptcy  were  significant,  particularly  when  there  remained 
the  possibility  of  further  loans  providing  public  opinion  would 
consent.  Public  opinion  then,  in  matters  of  debt,  was  a  thing  to 
be  conjured  with.  But  if  $100,000  to  the  constitutional  conven- 
tion of  Maryland  in  1851  was  sufficient  because  it  was  added  to 
the  millions  outstanding  and  would  have  been  ** frivolous''  if  cir- 
cumstances had  been  different,  how  much  more  frivolous  is  such 
an  amount  for  the  same  state  or  any  other  state  of  equal  wealth 

at  the  present  time. 

But  public  opinion  had  changed.  **The  first  great  error  in 
state  policy,  committed  in  Michigan,  was  the  borrowing  of  money. 
A  state  can  seldom  borrow  money  with  advantage  to  its  citizens. 
Its  only  legitimate  means  is  the  taxes,  levied  for  the  support  of 
its  government.  It  should  not  be  a  money  dealer,  nor  should  it 
embark  in  any  other  business  appropriately  within  the  sphere  of 
individual  enterprise.  "2«  *'It  is  not  the  design  of  our  govern- 
ment to  maintain  and  conduct  works  of  internal  improvement."" 
''The  only  aim  of  a  republican  form  of  government  should  be  to 
protect  its  citizens  in  the  enjoyment  of  life,  liberty  and  the  pur- 
suit of  happiness.  Everything  which  conduces  to  partial  legis- 
lation, which  raises  local  questions,  and  creates  sectional  difficul- 
ties, should,  as  far  as  possible  be  studiously  avoided.  "^^  '*The 
correctness  of  the  principle  of  an  entire  separation  of  state  from 


*"The  rise  of  corporations  into  such  power  that  they  menace  the  stability 
of  society,  by  controlling  in  their  favor  legislation,  dates  from  the  time  when 
the  states  were  deprived  of  all  direct  control  over  inland  transportation." 
Adams,  H.  C,  "The  State  in  its  Relation  to  Industrial  Action."  Publications 
of  the  American  Economic  Association,  vol.  i,  p.  68   (1887). 

"lilessage  of  Governor  J.  S.  Barry  of  Michigan,  1845.  Joint  DocumentSj 
p.  16. 

"•'Report  of   the  Committee  on  Finance."     Senate  Document  No.  8,  p.  19, 

Michigan. 

*8  Ihid.,  p.  19. 


[43] 


r^ff 


44 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


4S 


• 


private  enterprise  and  speculation,  and  leaving  to  individual 
energy  and  private  capital  the  construction  of  such  works  as  the 
facilities  of  commerce  may  require,  is  being  established  by  time 
and  the  experience  of  other  states. ''^9    ^^The  public  mind  has 
changed ;  and  public  sentiment  is  for  leaving  this  thing  (internal 
improvements)  to  private  enterprise. '^  ^o    ^'ggldom  has  a  revo- 
lution been  more  complete  than  that  which  has  just  taken  place 
in  public  opinion,  within  the  last  six  years,  on  the  questions  of 
commerce  and  finance.    Until  recently  the  great  business  of  leg- 
islation was  to  borrow  money,  by  pledging  the  faith  of  a  sovereign, 
state,  engage  in  internal  improvements,  charter  banks,  and  stim- 
ulate a  great  variety  of  extravagant  speculations/ *  «^     Opinion 
did  change;  the  constitutional  restrictions  are  conclusive  evi- 
dences of  it.    No  objection  or  criticism  is  offered  because  of  the 
change.    What  is  held  up  to  view  and  what  is  questioned  is  the 
propriety  of  allowing  the  experience  out  of  which  this  opinion 
took  form  to  be  the  sole  criterion  which  marks  off  the  appropriate 
sphere  of  the  state  in  industrial  matters,  and  discredits  the  use  of 
public  borrowing..    Public  opinion  is  invariably  the  crystalization 
of  experience,  but  experience  is  transcient  and  continuous,  and 
pubic  opinion  needs  constantly  to  re-adjust  itself  in  the  light  of 
new  experience  and  problems. 

What  we  desire  to  say  on  the  subject  of  public  borrowing  as  a 
financial  instrument  for  the  modern  state  may  be  reduced  to  two 
mam  considerations,  and  it  is  to  these  which  we  shall  now  direct 
our  attention.  First,  the  accepted  functions  of  the  state  in  our 
present  economy;  and,  second,  the  fiscal   expediency  of  public 


-Annual  Message  of  the  Governor  of  Alabama.   (1857)  quoted  in  Martin    W 
^olZ:T.7l  I-P-vements  in  Alabama."     JoHns  HopL^s   UnVe^s^y'Tu'Z: 

K::ft::\sZ'  TiT""''  ^^  ^^^  ^-«^u«-az  Conrenuon  of  tUe  State  of 
"Boutwell,  G.  S..  in  Hunt's  Merchant  Magazine,  vol.  8,  p.  153,  (1843). 


CHAPTER  4 
THE  USE  OF  BORROWING  BY  THE  MODERN  STATE 

If  the  full  effects  of  the  constitutional  restrictions  upon  the 
&iancial  policies  of  the  states  could  have  been  foreseen,  it  is  doubt- 
f ul  if  the  early  conventions  would  have  been  so  eager  to  impose 
them.^  But  the  state  had  failed  to  hold  successfully  the  indus- 
trial field  against  a  people  clamoring  for  internal  improvements 
and  against  corporations  struggling  for  privileges.  Men^s  minds 
had  changed  concerning  the  appropriate  sphere  of  the  state,  and 
it  was  but  a  short  step  from  the  rejection  of  state  ownership  and 
control  to  the  advocacy  of  a  strict  policy  of  laissez  faire.  People 
came  to  look  upon  industrial  activity  as  the  peculiar  function  of 
private  initiative,  and  to  resent  even  moderate  state  interfer- 
ence.^ 

Most  of  the  early  restrictions  were  born  of  conditions  and  of  a 
philosophy  which  ripened  out  into  a  policy  of  let-alone  and  mark 
the  return  swing  of  the  pendulum  against  the  excesses  of  the  past. 
On  the  whole,  the  attitude  toward  state  debt  which  these  restric- 
tions express  is  still  adhered  to,  albeit  that  the  circumstances  out 
of  which  it  arose  have  almost  been  forgotten.  Economic  advance 
has  placed  us,  in  many  respects,  in  a  new  world.  In  view  of  our 
<jhanged  environment  and  of  the  pressure  of  economic  problems, 
as  well  as  of  the  increased  part  which  the  state  is  necessarily 
playing  in  our  social  and  economic  life,  it  seems  wholly  pertinent 
to  ask  the  questions :  Are  the  restrictive  measures  in  our  constitu- 


[44] 


»  "The  spirit  of  these  enactments,  however  harsh,  may  be  justifiable  in  view 
of  the  reeljlessness  and  extravagance  of  the  past;  but  let  us  understand  that 
we  are  doing  penance,  and  not  pretend  to  say  that  such  is  a  normal  one  for 
a  healthy  commonwealth."  Reed,  H.,  "Some  Late  Effects  at  Constitutional 
Reform."     North  American  Review,  vol.   121,  p.   26,    (1875). 

*Vide,  "The  Increase  of  State  Interference  in  the  United  States."  Science, 
Tol.  X,  July  1,  1887.  This  is  a  resume  of  the  answers  received  from  leading 
American  Economists  and  Political  Scientists  on  the  significance  of  increased 
state  interference. 

[45] 


P  ' 
^f 


i 


III 


% 

3 


46 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


tions  governing  the  state's  indebtedness  and  use  of  credit  privi- 
leges of  such  a  character  as  to  admit  of  a  proper  solution  of  the 
financial  problems  with  which  the  states  must  deal  ?     Should  our 
modern  states,  with  the  demands  that  are  made  upon  them  in  sat- 
isfying public  wants  and  in  furnishing  public  services,   be  re- 
quired to  confine  their  activities  within  the  present  narrow  range 
because  of  the  retention  of  a  financial  policy  adopted  according 
to  specifications  laid  down  in  the  constitutional  restrictions  out- 
lined ?    Moreover,  future  financial  policies  must  be  in  accord 
with  future  views  on  the  questions  of  highway  construction,  con- 
servation of  mineral  and  water  power  resources,  etc.     The  atti- 
tude of  the  states  toward  the  newer  questions  is  a  matter  of  poli- 
tical philosophy.     Their  adjustment,  however,  is  a  question  of 
economics  and  calls  for  enormous  expenditure  of  public  moneys, 
and  is  it  not  an  open  question  whether  a  policy  of  debt  restric' 
tion  is  adapted  to  the  problems  at  hand  ?     Some  light  is  thrown 
upon  these  interesting  questions  by  the  attitude  of  a  number  of 
foreign  countries,  but  a  statement  of  this  we  defer  for  a  mo- 
ment. 

The  individual  today,  perhaps  more  than  at  any  other  time,  has 
become  the  center  of  our  attention.     The  policy  and  practice  of 
protecting  class  interest  is  slowly  fading  before  the  program  of 
conserving  individual  interests.     The  *' people ''—i.   e.   as  indi- 
viduals— are  coming  to  be  recognized  not  as  silent  partners  in  the 
game  of  government,  where  the  many  are  asked  to  contribute  and 
the  few  receive  the  return  from  the  contribution,  but  as  equally 
favored  creditors  to  share  the  gains  coincident  with  advancing 
civilization.    In  support  of  this  awakening  for  the  common  bene- 
fit, one  needs  only  to  look  at  the  telling  public  sentiment  against 
a  betrayal  of  the  interests  of  the  people ;  in  the  clamor  for  pub- 
licity in  all  fields  which  in  any  way  are  concerned  with  public  in- 
terests.    The  increasing  desire  to  equalize  the  benefits  and  profits 
from  enterprises  is  realizing  itself  in  standards  of  reasonableness. 
What  are  these  but  evidences  of  a  brighter  out-look  of  the  people* 
not  as  a  class,  just  to  be  pampered  and  then  pushed  aside,  but 
as  a  great  whole  the  conservation  of  whose  strength  and  virility 
must  always  be  the  end  in  view!    Consider  for  a  moment  the 
enormous  expenditure  of  all  grades  of  government  for  education, 

[46] 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


4T 


for  the  distruction  of  those  evils  coincident  to  civilization  which 
retard  its  growth,  and  the  general  shifting  of  the  center  of  ex- 
penditure to  those  things  which  improve  the  common  weal.  The 
state  is  of  necessity  precipitating  itself  into  the  life  of  every  indi- 
vidual. More  and  more  of  the  stream  of  income  is  being  diverted 
from  private  to  public  channels,  and  things  we  were  wont  to  look 
upon  as  falling  clearly  within  the  domain  of  private  initiative  are 
now  universally  recognized  to  be  peculiarly  within  the  province 
of  the  state.  In  taxation  we  are  moving  from  the  principle  of 
the  fee  and  price  to  the  principle  of  the  tax ;  in  public  expendi- 
ture, the  movement  is  from  special  measurable  benefit  to  common 
immeasurable  benefit. 

State  activity,  so  necessary  to  modern  life,  is  dependent  upon 
revenue.  As  proof,  witness  the  enormous  growth  of  expendi- 
ture, the  search  for  new  sources  of  revenue,  and  the  attempts  to 
distribute  the  burdens  strictly  according  to  ability  in  the  hope  of 
making  them  less  onerous,  and  to  equalize  the  pressure  by  a  well 
balanced  system  of  expenditure.  Looked  at  from  every  angle, 
the  rights  of  the  individual  are  being  exalted,  the  organic  nature 
of  society  emphasized  and  the  dependence  of  man  upon  the  state 
demonstrated.  It  is  in  the  movement  for  a  more  perfect  realiza- 
tion  of  the  relation  of  the  individual  and  the  state,— a  struggle 
for  more  enlightened  cooperation— that  we  need  to  free  ourselves 
from  the  idea  of  the  appropriate  activity  of  our  states  be- 
queathed to  us  from  an  environment  clearly  foreign  to  modern 
conditions.  As  respects  almost  every  field  of  social  endeavor,  of 
human  activity,  the  laissez  faire  doctrine  has  given  away  to  the 
idea  of  enlightened  cooperation.  In  the  one  field  of  public  debt 
we  have  adhered  to  the  philosophy  of  inaction. 

If  the  purpose  of  the  restrictions  on  the  financial  powers  of  the 
states  was  to  prohibit  the  use  of  credit,  they  have  served  it  well.' 
If  the  restrictions  were  intended  to  take  the  states  out  of  the  in- 
dustrial field  they  have  been  as  equally  successful.  That  the  pur- 
pose in  mind  was  often  of  this  double  character,  there  can  be  no 
doubt,  but  that  such  was  in  every  case  a  policy  of  wisdom  may  be 
questioned.    State  borrowing  is  in  essence  a  question  of  political 

*The  per  capita  debt  of  the  states  in  1870  was  $9.15;  In  1880,  $5.48;  in 
1890,  $3.37 ;  and  in  1902,  $2.99.     Wealth,  Deht  and  Taxation.     (1907)   p.  131. 

[47] 


f 


I 


■J" 


48 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


and  financial  expediency,  and  its  use  or  non-use  should  be  judged 
by  political  standards  and  by  the  rules  of  finance.    At  any  time, 
given  the  needs  for  public  revenues,  there  are  two  sources  open 
for  their  acquisition,  viz.,  direct  taxation  and  public  borrowing. 
The  method  used  will  be  governed  largely  by  the  purposes  for 
which  the  money  is  to  be  expended.    If  the  amount  is  large,  and 
the  expenditure  of  a  non-recurrent  nature,  and  such  that  taxation 
cannot  or  ought  not  to  be  adjusted  to  raise  the  money,  then  pub- 
lic credit  should  be  utilized.     The  duration  of  loans  should  be  de- 
termined by  the  benefits  accruing  from   the  expenditures,    and 
the  rule  of  equality  between  the  present  and  the  future  become 
the  guide.     Even  with  the  most  restricted    state   policy  public 
borrowing  remains  a  valid   instrument  of  public   financiering. 
Borrowing,  far  from  always  bemg  an  evil,  is  frequently  a  public 
good,  providing  it  is  not  used  as  a  cloak  for  perpetual  debt. 

The  appropriate  limits  to  state  action,  on   the  other  hand, 
rather  than  being  primarily  a  question  of  public  finance  is  one 
of  political  philosophy.     These  two  ideas  were  unfortunately 
confused  in  the  minds  of  our  early  constitution  makers,  because, 
by  conjuncture,  extended  state  activity  brought  with  it  an  abuse 
of  public  credit.    The  two,  however,  are  not  necessarily  related, 
except  that  state  activity  calls  for  extended  and  varied  expendi' 
ture,  and  under  such  conditions  public  credit  may  be  advan- 
tageously used.    But  either  may  be  separately  justified :  they  are 
not  mutually  exclusive.     Borrowing  may  be  justified  under  any 
theory  of  the  functions  of  the  state— laissez  faire  or  restrictive. 
Again,  there  was  confusion  between  the  use  of  credit  and  the  real 
abuses  which  were  sought  to  be  checked.    It  was  essentially  the 
necessity  of  taxation  against  which  complaints  were  made,  and  to 
escape  this,  from  an  early  time,  interest  payments  were  provided 
for  by  additional  loans  and  the  payment  of  debt  deferred  in  the 
hope  that  expected  revenues  would  finally  expunge  it.     But 
when  the  revenues  failed  to  materialize  in  sufficient  quantities, 
and  the  burden  of  debt  became  imminent,  the  questionable  policy 
of  suspending  the  works— of  ten  a  source  of  revenue  with  prudent 
management— and  the  prohibition  of  further  borrowing  were  re- 
sorted to,  and  debt  payment  refused  by  the  deceptive  device  of 
funding.    Delay  in  paying  or  refusal  to  pay— the  real  weakness 

[48] 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


4d 


and  the  source  of  evil  in  the  use  of  public  credit— was  retained, 
and  the  principle  of  debt  as  a  financial  device  repudiated.  The 
exigencies  of  the  time  together  with  the  aversion  to  and  the  in- 
ability to  bear  taxation  were  the  causes  of  the  confusion. 

It  is  not  within  our  province  to  question  or  to  justify  the 
present  day  relationship  of  the  state  and  the  individual.  Suf- 
fice it  to  say,  that  it  is  very  close  and  all  evidences  point  to  an 
even  closer  relationship  for  the  future.  What  is  within  our 
province  is  to  point  out  that  the  constitutional  restrictions  upon 
the  states'  use  of  the  borrowing  power  are  not  in  harmony  with 
the  organic  concept  of  society.  Whether  the  amount  of  revenue 
to  be  acquired  by  borrowing  or  otherwise  should  be  limited  is  a 
question  of  the  nature  of  the  return  flowing  from  its  use,  and 
not  of  any  prejudged  philosophy  resulting  from  a  period  of 
abuse  under  social  and  economic  conditions  wholly  unlike  those 
of  the  present.  The  s*tate  is  an  organism,  and  its  essential  nature 
like  that  of  life  in  general  is  dynamic,  and  no  cut-and-dried  field 
of  endeavor  can  be  mapped  out  as  good  for  this  and  all  future 
times.  If  this  is  true  then  the  above  limitations  for  the  most  part 
are  inappropriate,  when  made  a  part  of  constitutions,  since  finan- 
cial expedients  can  not  readily  be  adjusted  to  a  changing  political 
philosophy.  The  state  should  and  does  conserve  the  interests  of 
the  people  in  perpetuity,  and  a  philosophy  of  a  rigid  character 
should  never  control  its  policy  or  hamper  its  use  of  borrowed 
funds  if  they  are  necessary  for  its  operation. 

We  are  not  suggesting  a  return  to  the  unrestricted  use  of  state 
credit,  nor  intimating  that  it  is  wise  necessarily  for  the  state  to 
enter  all  fields  of  competitive  business.  The  point  of  view  taken 
is  that  constitutional  restrictions  on  public  debt,  and  necessarily 
upon  state  activity,  do  not  accord  with  the  accepted  philosophy 
of  the  functions  of  the  state.  Our  experience  with  internal  im- 
provements can  in  no  wise  be  considered  as  equivalent  to  the  hand 
writing  on  the  wall  forever  putting  under  ban  direct  state  activ- 
ity in  industrial  enterprise.  Conditions  surrounding  these  ven- 
tures were  abnormal  and  furnish  us  with  questionable  experience 
upon  which  to  test  the  legitimacy  of  future  state  policy.  Indeed, 
if  sober  thought  be  given  to  the  purposes  and  methods  of  borrow- 
ing money  common  to  the  states  whose  financial  history  we  have 


[49] 


i 


50 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


51 


briefly  treated,  and  to  all  those  where  excesses  were  indulged  in^ 
and  these  be  judged  in  the  light  of  the  simplest  standards  of  pru- 
dence and  established  rules  of  justice,  it  is  not  easy  to  see  how  the 
ventures  could  have  ended  otherwise  than  in  failure.  It  is  one 
thing  to  make  a  financial  and  industrial  success  of  a  railroad  or 
canal  which  is  intended  to  serve  a  sparsely  settled  country  with-, 
out  commercial  or  agricultural  development,  or  to  successfully 
conduct  a  bank  whose  chief  function  is  the  manufacture  of  bank 
notes,  where  the  whole  atmosphere  is  saturated  with  a  mania  for 
speculation,  when  currency  is  unstable,  where  the  machinery  of 
taxation  is  undeveloped  and  taxable  values  hardly  exist.  Suc- 
cess under  such  extraordinary  circumstances  for  private  com- 
panies heavily  subsidized  was  always  problematical.  Indeed, 
failures  were  common.  One  can  disapprove  of  the  ends  which 
the  states  sought  to  accomplish ;  he  can  also  object  to  the  methods 
used  to  realize  them  and  the  arguments  brought  forth  to  justify 
them,  and  still  such  criticism  and  disapproval  have  little  or  no 
application  to  modern  problems  and  conditions. 

Laissez  faire  both  as  a  political  philosophy  and  a  state  policy 
is  dead.  Social  and  economic  forces  have  made  imperative  state 
action.  The  fields  in  which  it  now  operates  comprise  almost  all 
of  the  relationships  of  life.  Some  activities  take  the  form  of 
regulating,  shaping  and,  in  a  large  measure,  determining  private 
activity.  The  execution  of  other  policies  may  demand  that  the 
state  itself  act.  Who  can  say  that  social  ends  would  not  be  bet- 
ter served  if  the  state  not  only  controlled  but  actually  developed 
its  natural  resources  ?  The  most  necessary  part  of  any  scheme 
of  industrial  development  of  Wisconsin,  for  instance,  may  be 
state  purchase  of  land  which  is  later  sold  upon  reasonable  terms 
to  bona  fide  settlers.  Adequate  protection  of  Wisconsin's  forests 
and  water  power  resources*  may  depend  upon  the  establishment 
of  immense  forest  reserves  and  the  purchase  of  power  sites. 

It  is  not  maintained  that  the  carrying  out  of  the  above  policies 
should  in  every  state  be  monopolized  by  the  public  powers.  It  is 
merely  pointed  out  that  the  trend  of   economic    and   political 

*  Illinois  owns  approximately  100,000  horse  power  on  the  Illinois  River  and 
voted  $20,000,000  as  a  loan  for  its  improvement.  Water  Power  Development 
in  the  United  States.     Washington,  D.  C,  1912. 

[50] 


events  may  require  us  to  follow  the  example  of  European  coun- 
tries, where  social  and  economic  advancement  has  seemed  to  make 
imperative  the  adoption  of  some  such  definite  state  policy,  in 
order  to  protect  the  public  interests  against  the  rapidly  extend- 
ing control  of  private  corporations  over  natural  resources,  etc. 
One  need  only  refer  to  the  experiences  of  most  European  and 
Australasian  countries  in  the  nationalization  of  land  to  catch  the 
drift  of  the  movement.  In  the  United  States,  Massachusetts 
seems  to  be  the  only  state  wherein  the  failure  of  private  initiative 
to  provide  necessary  and  adequate  homes  for  artisans,  mechanics, 
laborers,  etc.,  is  recognized  and  the  ^ate  has  taken  up  this  all  im- 
portant matter.  A  Homestead  Commission  has  been  established 
in  this  state  and  a  bill  introduced  in  the  legislature  empowering 
the  commission,  with  money  borrowed  from  the  state  to  buy  and 
lease  land,  build  houses,  etc.,  in  order  to  relieve  congestion  of 
population,  and  make  proper  provisions  for  wholesome  and  as- 
sured social  advancement.^  Many  of  the  problems  which  are 
pressing  for  solution  by  the  cities  have  their  counterpart  in  prob- 
lems which  only  the  states  can  solve.. 

If,  for  instance,  a  policy  of  land  purchase  and  sale  is  thought 
necessary  to  relieve  congestion  and  insure  the  development  of  our 
unusued  lands,  it  may  be  wise  to  adopt  a  like  policy  for  the  distri- 
bution of  desirable  immigrants  and  homeseekers.  The  part 
which  the  state  should  play  in  the  adjustment  of  these  newer 
problems  must  be  determined  in  the  light  of  a  clear  social  and 
economic  perspective  which  includes  all  the  financial,  political 
and  economic  consequences  involved.  If  a  choice  of  action  is  de- 
terrained  upon,  then  financial  means  suitable  to  its  most  speedy 
and  economic  accomplishment  must  be  at  hand,  and  it  is  precisely 
these  means  which  are  prohibited  from  use  by  rigid  constitu- 
tional restrictions  as  well  as  by  the  philosophy  to  wKich  they  give 
expression.     A  readjustment  of  means  to  ends  is  imperative. 

Some  of  the  restrictions  are  wholly  salutary.  Prudence  calls 
for  a  positive  policy  against  the  states  lending  their  credit  to  or 


'For  a  draft  of  this  bill  and  a  short  history  of  the  work  of  the  commission, 
as  well  as  a  short  account  of  the  activities  of  foreign  countries  in  housing  re- 
form, etc.,  Vide,  Massachusetts  Lalor  Bulletin,  Number  88,  (1912),  A  useful 
*nd  extended  bibliography  on  this  and  related  topics  is  also  contained  therein. 


[51] 


62 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


53 


™iiti 


subscribing  to  the  shares  of  private  corporations.  The  period  of 
capitalistic  infancy  has  passed  and  there  is  now  no  need  for  the 
states  to  extend  their  steadying  arms  of  protection  while  indus- 
tries and  outlets  to  markets  are  established.  The  reverse  is  in 
many  instances  true.  Not  infrequently  it  is  necessary  for  the 
state  rather  than  to  coax  and  incite  private  capital  into  activity 
to  forcefully  curb  a  too  rapid  exploitation  of  industry  and  a  too 
intensive  competition  to  supply  markets.  Experience  proves  the 
necessity  of  incorporating  into  the  constitution  of  the  state  re- 
strictions on  this  practice. 

Moreover,  good  financiering  and  public  policy  seem  to  disap- 
prove of  the  privileges  of  funding  to  any  and  all  loans  which  a 
state  may  make.  The  real  cause  of  the  abuse  in  the  use  of  credit 
is  not  necessarily  in  the  amounts  borrowed,  but  in  the  deferment 
of  payment.  '  *  Pay  as  you  go  "  is  not  an  infallible  rule  of  finan- 
cial etiquette  when  construed  to  prohibit  the  use  of  credit  en- 
tirely, but  it  is  valid  as  a  general  guide,  pointing  to  the  advisa- 
bility of  speedy  payment.  The  universal  privilege  of  funding  is 
not  only  unnecessary  for  the  purposes  for  which  states  borrow, 
but  is  uneconomic  and  leads  to  waste  and  abuse. 

Borrowing  is  a  means  of  deferring  payment.  Often  it  fur- 
nishes an  opportunity  to  shift  tax  burden  too  far  into  the  future. 
To  guard  against  this,  provisions  requiring  the  payment  of  all 
loans  within  a  stated  number  of  years  have  been  made  a  part  of 
the  constitutions.  Unfortunately,  however,  the  companion  privi- 
lege of  refunding  has  accompanied  these  and  has  in  a  large  meas- 
ure negatived  them.  But  the  periods  specified  are  not  uniform, 
and  the  laws  providing  for  loans  do  not  as  a  rule  require  that 
debt  be  paid  in  less  time  than  the  maximum  period  stated  in  the 
constitutions.  No  single  time  can  be  best  or  just  for  all  pur- 
poses. The  nature  of  the  asset  acquired  is  one  criterion  of  the 
proper  period,  but  it  alone  is  not  conclusive.  In  the  case  of  tem- 
porary loans,  made  in  anticipation  of  collectible  revenue,  the  time 
should  be  short,  and  from  this  limited  time  will  be  found  all 
proper  periods  up  to  sixty  to  one  hundred  years  in  cases  of  assets 
which  will  show  no  depreciation  and  the  benefits  of  which  will 
accrue  to  succeeding  generations.  Roughly,  each  generation 
should  clear  its  own  slate,  and  pass  on  to  the  future  a  higher  level 

[52] 


of  well  being,  fully  realizing  that  with  the  development  of  society 
constantly  more  and  more  revenue  will  be  needed  and  borrowing 
more  frequently  resorted  to. 

But  under  present  conditions,  it  is  said,  there  are  few  constitu- 
tions which  allow  no  indebtedness  outside  of  that  necessary  to  re- 
pel invasion  etc.,  and  many  which  admit  of  unlimited  borrowing 
if  popular  consent  is  given.  But  popular  approval  of  every  loan 
over  and  above  a  paltry  sum  is  often  times  difficult  to  get,  and  the 
failure  to  get  it  not  only  curbs  the  legislatures  from  making  ruin- 
ous and  illegitimate  expenditure,  but  also  may  prevent  them  from 
performing  a  valid  and  needed  service  often  times  at  a  much  re- 
duced final  cost.  The  building  of  a  state  capital  is  a  case  in 
point.  This  is  true  unless  it  is  a  fact  that  the  will  of  the  people 
should  be  consulted  directly  on  every  public  expenditure.  That 
this  is  true  may  be  questioned,  particularly  as  the  impeding  or 
obstructing  power  is  more  likely  to  be  used  than  the  power  of  in- 
itiating. The  public  should  always  possess  the  power  to  register 
their  objections,  but  that  their  approval  should  be  necessary  at 
every  move  of  the  legislature  may  indeed  be  questioned. 

Public  debt  is  not  always  a  blessing  as  the  experiences  of  the 
internal  improvement  period  clearly  demonstrates.  When 
abused,  it  is  rather  a  curse.  What  has  been  said  is  in  justifica- 
tion  of  its  use  as  a  financial  expedient  in  view  of  changed  eco- 
nomic and  social  conditions.  The  insecurity  in  banking,  the  pau- 
city of  developed  public  resources,  the  imperfections  in  the  ma- 
chinery of  taxation,  the  philosophy  of  the  forties  etc.,  have  all 
been  supplanted  by  a  healthy,  consistent  economic  growth  which 
will  make  impossible  a  duplication  of  our  early  experiences.  The 
relations  of  individuals  to  the  state  have  changed,  enormous  pub- 
lic expenditures  have  not  only  become  necessary  but  the  public 
is  constantly  demanding  their  increase.  More  and  more  exten- 
sive enterprises  are  being  undertaken  by  the  state  in  the  satis- 
faction of  growing  public  needs  and  conveniences,  and  the  neces- 
sity for  the  use  of  public  credit  is  fast  becoming  imperative.  We 
have  paid  our  penance  and  clothed  ourselves  in  sack  cloth  and 
ashes  for  the  misdeeds  of  the  past  long  enough.  Let  us  acknowl- 
edge our  changed  economic  relations  and  the  necessity  for  state 
action  and  adapt  our  canons  of  public  finance  to  its  most  perfect 
realization. 

[53] 


I 


64 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


66 


CHAPTER  1 

THE  ORIGIN  OF  CONSTITUTIONAL  RESTRICTIONS 
UPON  MUNICIPAL  INDEBTEDNESS  IN  THE 

UNITED  STATES 

The  constitutional  restrictions  upon  the  debt  incurring  power 
of  municipalities  in  the  United  States  had  their  origin  in  condi- 
tions not  unlike  those  which  have  been  sketched  in  the  preceding 
chapters.  So  far  as  the  states  are  concerned,  constitutional  debt 
restrictions  were  general  as  early  as  1857.  Their  proximate 
causes  were  the  unwarranted  expansion  of  credit  in  financial  and 
industrial  ventures  which,  either  because  of  their  inherent  diffi- 
culties or  bad  management,  ceased  to  be  profitable,  and  because 
the  fear  of  heavy  taxation  had  been  replaced  by  actual  taxation. 
Like  conditions  almost  invariably  bring  like  results.  Dreams  of 
financial  greatness  were  indulged  in  and  extravagance  was  the 
result.  Cities  and  other  local  divisions  of  the  several  states  were 
plunged  so  heavily  into  debt  that  constitutional  restrictions 
against  further  debt  seemed  to  be  the  only  adequate  method  of 
securing  relief.  These  causes  and  conditions  were  part  and  par- 
cel of  that  mania  of  speculation  which  culminated  in  the  crisis 
of  1873. 

The  country  seems  to  have  been  fairly  prosperous  during  the 
four  or  five  years  following  the  close  of  the  Civil  War.  Capital 
was  abundant  and  eagerly  sought  investment  opportunities.^ 
But  in  1869  the  opening  of  the  Pacific  railway  seemed  to  be  a  sig- 
nal for  excessive  speculation.  Enormous  land  grants  were  al- 
most indiscriminately  conferred  upon  railroads  and  securities, 
floated  by  these,  sold  to  unduly  sanguine  investors  at  home  and 
abroad.  Prospectuses  of  investment  opportunities  in  the  United 
States  were  scattered  broadcast  and  salesmen,  receiving  enormous 


^  White,    Horace,    "The   Financial   Crisis   in   America." 
vol.   25,  p.  876. 


Fortnightly    Review, 


commissions,  were  sent  to  foreign  countries  in  order  to  inlist  the 
support  of  financial  interests.^  England,  Germany,  and  Holland 
in  particular,  furnished  lucrative  markets  for  these  securities. 
But  foreign  capital  was  timid  without  an  assurance  that  the  lo- 
cal divisions  of  the  several  states  would  in  essence  guarantee  the 
loans  made.  This  assurance  the  municipalities  in  many  places 
were  eager  to  give.  Hence  there  arose  a  general  scramble  on  the 
part  of  railroads  and  other  corporations  for  direct  or  indirect 
public  subsidies. 

The  states  were,  in  most  instances,  prohibited  from  giving  their 
financial  support  to  private  companies  as  they  had  in  the  earlier 
period.  The  local  divisions,  however,  since  they  possessed  the 
taxing  power,  and  because  the  prohibitions  against  the  states' 
subsidizing  private  corporations  were  not  construed  as  extending 
to  them,  were  appealed  to  for  aid.  As  the  fever  of  speculation 
spread  and  railroad  building  increased,^  the  debts  of  municipali- 
ties grew  apace.  Not  that  railroads  were  not  constructed  in  this 
period  by  private  capital,  for  they  were ;  nor  that  railroad  aid 
was  the  only  cause  of  municipal  debt ;  but  there  existed  a  close  re- 
lationship between  the  amount  of  local  debt  incurred  and  the 
railroad  construction  of  the  period. 

Before  1873  little  attention  had  been  paid  to  the  growth  of 
local  debt.  Inadequate  provisions  were  made  for  payment ;  the 
future  looked  fruitful  and  prosperous  through  the  increased 
values  which  were  expected  to  result  from  the  development  of 
commerce.  The  obligations,  it  was  felt,  **  would  be  paid  either 
by  the  issue  of  new  bonds,  or  perhaps,  no  thought  whatever  was 
bestowed  on  the  matter.  The  only  thought  was  to  sell  the  bonds 
and  to  get  the  money  and  to  pay  it  to  the  persons  to  whom  it  be- 
longed. ' '" 

But  the  Crisis  furnished  a  breathing  spell,  a  moment  for  re- 
flection, as  it  were,  and  the  full  extent  of  the  evil  was  then  real- 


[54] 


'  "In  some  cases  with  grants  of  town  lots,  or  even  whole  town  sites  In  special 
cases,  to  stimulate  exertion  and  to  reward  successful  zeal.''  Commercial  and 
Financial  Chronicle,  Dec.  21,  1872,  p.  822. 

*0f  the  67,000  miles  of  railroad  in  the  United  States  in  1872,  20,000  miles 
were  constructed  in  the  three  preceding  years.  Commercial  and  Financial 
Chronicle,  Dec.  21,  1872,  p.  822.  . 

*The  Bankers'  Magazine  (New  York),  vol.  38,   pp.  823-24,  ,(1884), 

[55] 


56 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


SECRIST-RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


57 


m 


ized.^  The  total  debt  of  Massachusetts  cities  and  towns  had  in- 
creased from  $34,826,860  in  1870,  to  $80,427,245  in  1874— a  mat- 
ter of  134  per  cent.,  while  the  valuation  had  increased  but  29  per 
cent,  and  taxes  but  31  per  cent.  In  1879,  the  debt  of  Newark, 
New  Jersey,  represented  one  ninth  and  that  of  Jersey  City  one- 
fifth  of  their  respective  assessed  values.  Interest  on  these  loans 
was  being  paid  from  borrowed  funds,  and  all  considerations  of 
prudence  cast  aside.^  Cases  were  not  infrequent  where  bonds 
were  issued  by  districts  in  excess  of  the  total  assessed  value  of  all 
the  taxable  property  therein.^  The  debt  of  130  of  the  largest 
cities  in  the  United  States  in  1876  showed  an  increase  of  200  per 
cent,  in  ten  years,  while  the  annual  taxation  increase  was  83  per 
cent,  and  the  valuation  of  property  75  per  cent,  in  the  same 
period.^  The  following  table  shows  the  municipal  indebtedness 
in  the  United  States  for  the  period  1866  to  1876  for  various  sized 

TABLE  E 

TABLE  SHOWING  POPULATION,  DEBT.  VALUATION  AND  ANNUAL  TAXES  FOB 
CERTAIN  CITIES  OP  THE  UNITED  STATES  FOB  1876  AND  IS66.1 

(GOO'S  omitted.) 


Total 

all 

cities. 


Population,  1876 

Population,  1866 

Population,  perct.    increase 

Total  debt,  1876 

Total  debt,  1866 '.[ 

Debt,  per  cent,  increase 

Valuation,  1876 

Valuation,  1866 

Valuation,    perct.   increase 

Annual  taxes,  1876 

Annual  taxes,  1866 

Annual  taxes,  percent.  In- 
crease  


8,576 
5,920 
44.0 
$604,832 
$221,312 
173.3 
$6,175,082 
$3,551,619 
78.9 
$112,711 
$64,060 

76.1 


56  cities 
popula- 
tion less 
than 
20,000 


Total 

74 
cities. 


37  cities 
popula- 
tion  20— 
40,000 


592 

464 

273 

$51,035 

$20,249 

152.1 

$.380,943 

$197,675 

92.7 

$6,259 

$3,194 

95.9 


7,984 

5,4.56 

46.3 

$553,797 

$201,063 

175.3 

$5,794,139 

$3,254,544 

78.0 

$106,4.52 

$60,866 

74.9 


1.024 

725 

41.2 

$54,728 

$21,209 

158.0 

$566,052 

$297,459 

90.3 

$9,072 

$5,320 

70.5 


17  cities 
popula- 
tion 40— 
100,000 


955 

663 

44.1 

$45,822 

$15,861 

189.9 

$654,201 

$303,276 

115.7 

$10,022 

$5,120 

95.7 


20  cities 
popula- 
tion   i 
100,000 
and  over 


6,004 

4,067 

47.6 

$453,247 

$163,993 

176.5 

$4,573,905 

$2,653,809 

72. S 

$87,357 

$50,425 

7S.2 


^  Banker's  Magazine  (New  York)  vol.  32  (1877)  p.  362. 

cities.     These  data  clearly  show  that  the  increase  of  debt  far  ex- 
ceeded the  increase  of  population,  valuation  and  annual  taxes  for 

■  The  Commercial  and  Financial  Chronicle,  April  10,  1875    p    346 
*2iew  Jersey  Law  Journal   (1879),  vol.  2,  p.   90.      '  * 

'Dillon,  J.  F.,  The  Law  of  Municipal  Bonds,  (1876)    p    5 

af\l?T'^'*''  i^'^^^l  ^^^^'  P-  ^'  ^"^"°^  ^^^'^^t   P.' Porter;    cf..   Journal 
of  the  American  Social  Science  Association,  vol.  xi,  p.  61.  «'"«r«a» 

[56] 


all  classes  of  cities,  and  that  the  increase  in  the  per  cent,  of  debt 
for  cities  with  population  over  100,000  is  more  than  for  the  total 
of  all  cities,  while  the  percentage  increases.for  both  valuation  and 
taxation  are  smaller  than  for  all  cities.  In  the  light  of  the  facts 
one  can  understand  the  views  of  a  contemporary  of  the  period 
who  wrote:  *' Among  the  minor  financial  problems  of  the  day, 
some  of  the  most  pressing  and  vital  arise  out  of  municipal  debts, 
and  the  dangerous  facilities  which  exist  for  their  increase."^ 

But  the  increase  of  municipal  debt,  per  se,  so  characteristic  of 
growing  municipalities  was  not  sufficient  cause  for  alarm,  but 
when  viewed  in  the  light  of  social  and  political  policy  it  became 
a  burning  question.  The  country  was  then  upon  a  non-specie 
paying  basis,  enormous  quantities  of  silver  were  flooding  the 
markets,  and  although  the  last  hope  for  cheap  money  was  seem- 
ingly crushed  by  the  Act  of  1873,  it  was  soon  to  take  on  new  life 
and  remain  an  issue  well  down  into  the  nineties.  All  this  served 
to  unsettle  men's  minds.  Moreover,  the  crisis  was  looked  upon 
more  or  less  as  a  fleeting  evidence  of  the  baneful  effects  of  a  sec- 
ondary standard  and  not  to  be  attributed  primarily  to  excessive 
speculation.  That  this  was  true  in  part,  at  least,  is  shown.by  the 
fact  that  the  agitation  for  railroad  extension  and  other  specula- 
tive enterprises  had  practically  regained  its  full  vigor  by  1879.^*> 
Conditions  were  propitious  for  further  abuses  of  the  credit  sys- 
tem when  the  crisis  should  wear  away.  Because  of  this  people 
began  to  complain  and  the  legislatures  were  filled  with  all  sorts 
of  remonstrances  against  the  general  policy  and  practice  of  sub- 
sidizing private  capital.  The  outlook  once  so  rosy  now  took  on  a 
different  hue.  Railroads  defaulted  their  interest  payments  and 
creditors  were  obliged  in  many  cases  to  look  to  the  tax  payer  for 
the  interest  and  principal  of  loans  guaranteed.  So  long  as 
money  was  easily  borrowed  the  plan  of  living  in  the  future 
worked  admirably,  but  when  conditions  changed  there  arose  a 


•  The  Bankers'  Magazine  (New  York),  Sept  1876,  vol.  xi,  3rd  series,  p.  183. 
Vide,  also,  IMd.,  June,  1876,  p.  946. 

*'The  annual  increase  of  miles  of  railroads  constructed  in  the  United  States 
from  1872  to  1880  was  as  follows :  1872,  5,870 ;  1873,  4,097 ;  1874,  2,117 ;  1875, 
1,711;  1876;  2,712;  1877,  2,274;  1878,  2,665;  1879,  4,809;  1880,  6,711. 
Statistical  Abstract  of  the  United  States,  1909,  p.  262. 

[57] 


68 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


S9 


general  dissatisfaction  against  both  the  theory  and  practice  of 
state  subsidy.^^ 

Many  people  saw  more  in  this  movement  than  the  mere  increase 
of  debt.    An  equally  objectionable  thing,  and  one  much  more 
serious  in  its  ultimate  consequences,  was  the  state  of  mind  which 
the  unbridled  use  of  the  credit  system  fostered."     Taxes  were  al- 
lowed to  go  delinquent — in  fact,  direct  taxes  were  frequently  not 
levied, — borrowing  was  freely  indulged  in  to  pay  the  ordinary 
running  expenses  of  the  governments,  and  debts  when  due  were 
pushed  on  into  the  future  by  the  act  of  refunding."     These  prac- 
tices opened  the  door  for  corruption  among  city  officials,  and,  on 
the  whole,  were  not  objectionable  to  a  large  class  of  citizens  who 
lacking  the  moral  stamina  to  prevent  the  perpetuation  of  a  burden 
to  be  endured  in  the  future,  silenced  any  suggestion  of  an  increase 
in  the  tax  rate  to  provide  for  the  expenditures  of  the  present. 
With  another  class,  and  a  preponderating  one,  the  abuses  under 
whatever  form  were  objectionable,  and  the  proximate  cause  not 
only  of  increased  debt  but  of  municipal  dishonesty  and  corrup- 
tion was  held  to  be  the  demoralizing  influence  of  the  credit  sys- 
tem.    The  uprooting  of  this  was  necessary  to   the   solution   of 
municipal  problems  and  this  was  possible  only  by  depriving 
municipal  officials,  by  constitutional  enactment,  of  all  power  to 
mortgage  the  estates  of  tax  payers.^* 

This  attitude  of  mind  is  not  difficult  to  understand.  Munici- 
palities were  growing  rapidly— 12.5  per  cent,  of  the  population 
of  the  United  States  dwelt  in  cities  in  1850;  in  1880  the  corre- 
sponding percentage  was  22.5,  and  the  problems  of  city  growth 
were  new  and  difficult  to  solve.^^  The  accounts  of  municipalities 
were  then,  as  they  are  now,  imperfectly  kept ;  central  supervision 

"  TJie  Commercial  and  Financial  Chronicle,  May  15    1875    p    464 
"The  tendency  of  the  period  to  incur  debt  has  been  described  as  "epidemic 
insanity."     Dillon,  J.   F.,  The  Law  of  Municipal  Bonds    p    5 
i«s?®  Pe^  cent,  of  the  debt  for  cities  with  population   of   7.500  and  over  In 
1880  was  for  funding  floating  loans;  while  10  per  cent,  was  for  refunding  old 
debt.     Valuation,    Taxation   and   Public  Indebtedness    1880    p    290 
^* Bradstreet's,  May  22,  1880,  p.  4.     Ibid.,  July  28,  1880   p   4'     ' 
"•'All  circumstances  seem  to  have  combined   at  once 'to  produce  the  worst 

Lri  ;  ^      T  ''^^"  ^  '?'"'''^'°  "^  municipal  debts  and  a  record  of  municipal 
waste  and  extravagance  for  a  sad  remembrance  and  solemn  warning."     Bowles 
Samuel     'The    Relations    of    States    and    Municipal    Governments."     AmZcan 
Journal  of  Social  Sciences,  vol.  9,  p.  141.     (1877).  American 

[58] 


was  wholly  untried  and  administrative  machinery  scarcely  de- 
veloped at  all.  Under  such  conditions,  when  abuses  arose,  it  was 
but  natural  to  seek  for  an  absolute  remedy  and  apply  it  if  pos- 
sible. The  most  certain  check  on  excessive  borrowing  was  to  de- 
prive the  local  units  of  the  power  to  borrow  money,  and  the  way 
to  effectively  do  this  was  by  constitutional  restrictions.  The 
guarantee  of  prudence  and  honesty  in  city  administration  as  well 
as  common  sense  in  subsidizing  private  capital  lay  in  these 
means.  Other  sources  of  control  were  not  open,^®  and  the  neces- 
sity for  restrictions  of  some  type  was  urgent.  Taxation  came  to 
be  looked  upon  as  the  only  legitimate  method  for  raising  revenue, 
for  in  its  use  was  conserved  the  very  guarantee  against  excess, 
viz.,  the  bearing  of  immediate  burden. 

The  wave  of  sentiment  favorable  to  rigid  restrictions  on  mu- 
nicipal indebtedness  clearly  shows  itself  in  the  changes  made  in 
the  state  constitutions,  by  amendment  or  otherwise,  through  the 
period  1872  to  1879.  There  were  constitutional  prohibitions 
against  these  units  lending  their  credit  before  this  time,  but  they 
were  not  common.  Ohio,  in  1851,^^  was  the  first  state  to  abso- 
lutely prohibit  such  subsidies.  Indiana  prohibited  counties  from 
lending  their  credit  in  1851,  and^^  somewhat  restricted  their 
power  to  subscribe  to  the  stock  of  private  companies.  Oregon^^ 
and  Pennsylvania-'^  prohibited  municipalities  from  lending  their 
credit  or  subscribing  to  stock  in  private  companies  in  1857.  Cer- 
tain conditional  restrictions  were  imposed  in  Maryland,^*  Missis- 
sippi,^^  Missouri,^^  Nevada,-*  and  North  Carolina-^  during  the 
later  60  's.  But  the  movement  to  curtail  municipal  debt  was  not 
general  and  distinct  until  the  crisis  period  of  the  70  's.  None  of 
the  earlier  states,  with  the  exception  of  Ohio  and  Pennsylvania, 


"  "But  as  all  experience  shows  that  the  use  of  public  credit  by  local  officials 
defies  successful  regulation,  it  follows  that  the  primary  error  was  in  the  orig- 
inal grant  of  the  power  to  borrow  money."     Bradstreet's,  May  22,  1880,  p.  4. 

"  Constitution,  1851,  art.  viii,   sec.  6. 

"  Constitution,  1851,  art.   x,   sec.   10. 

"  Constitution,  1857,  art.  xi,    sec.  9. 

*>  Constitution,  1S57,  amendment  art.  xi,  sec.   7. 

^  Constitution,  1867,    art.    iii,    sec.    54. 

**  Constitution,  1868,  art.  xii,  sec.  14. 

^  Constitution,  1865,  art.  xi,  sec.  14. 

**  Constitution,   ISSJ^,   art.    viii,    sec.    10. 

*^  Constitution,   1S6S,    art.    vii,    sec.    7. 

[59] 


I 


60 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


which  curtailed  the  states'  power  of  lending  their  credit,  ex- 
tended the  same  prohibitions  to  the  minor  civil  divisions.  Prac- 
tically all  of  them  did  so,  however,  before  1880,  as  the  following 
tabular  statement  shows. 


Restrictions  upon  municipalities,  and  the  amount  of  railroad  aid  debt  for  cer- 
tain cities 


State 

Lending  their 

aid  to  private 

corporations 

Date  of  const. 

Becoming  stock- 
holders in  private 
corporations 
Date  of  const. 

Amount  debt  for 

railroad  aid, 
(cities  with  popu- 
lation over  7,500) 
outstanding:  1880. 

Alabama 

1875 
1874 
1879 
1876 
1877* 

1875 
1874 

1879 

1876 

18771 

18751 

1877 

1870 

1879 

18721 

1875 

18771 

1875* 

18741 

1876* 

18733 

18701 

1876 

$798,700 

21,331 

783,500 

Nothiner 

3,712,000 
16,497 

1,020,000 
876,500 
315,000 
895,000 

2,070,200 
865, 400 

Nothinsr 

8,028,380 
56,000 

4,195,027 
826,000 
373,500 

Arkansas 

California 

Colorado 

Connecticut 

Florida 

18751 

Georsri  a 

1877 

1870 

1879 

1872» 

1875 

18771 

1875» 

18741 

18762 

18733 

18701 

1876 

Illinois 

Louisiana 

Minnesota 

Missouri 

New  Hampshire 

New  Jersey 

New  Yorlc 

North  Carolina 

Pennsylvania 

Tennessee 

Texas 

1  Amendment. 
'  Not  absolute. 
»  Pennsylvania  had  imposed  her  restrictions  in  1857,  but  she  repeated  them  in  1873. 

Agitation  in  some  of  the  states  for  restricting  local  debt  had 
begun  long  before  the  restrictions  themselves  were  finally  written 
into  the  constitutions.    In  other  states,  when  public  sentiment, 
hounded  by  the  claims  and  distorted  by  the  promises  of  private^ 
capital,  was  not  strong  enough  to  insure  constitutional  prohibi- 
tions, the  courts  came  to  the  relief  of  the  people  and  challenged 
the  uses  to  which  public  moneys  were  being  put.    New  York  is  a 
prominent  example  of  the  first  class  mentioned,  while  Michigan, 
Wisconsin,  and  Iowa  are  the  leaders  in  the  other  movement  noted! 
Let  us  hastily  review  their  experiences  with  local  debt  and  the 
devices  adopted  to  check  its  increase. 

The  question  of  the  desirability  of  prohibiting  local  units  from 
granting  aid  to  or  subscribing  to  the  stock  of  private  corpora- 
tions was  raised  in  the  Constitutional  Convention  of  New  York 

'     [60] 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


ei 


in  1867,  and  a  proposition  to  that  effect  was  submitted  by  the 
-committee  in  charge.  The  proposal  was  smothered,  however,  by 
a  vote  of  41  to  55,  and  nothing  said  about  it  in  the  submitted 
constitution.^^  But  by  1872,  it  again  came  to  the  front,"  and  the 
Constitutional  Commission  appointed  in  that  year  to  propose 
amendments,  recommended  the  absolute  prohibition  of  aid  to  pri- 
vate corporations  in  any  shape.^«  This  provision  was  finaUy 
added  to  the  constitution  by  an  amendment  ratified  in  November 

UUP 

But  this  did  not  satisfy  the  opposition  to  pubUc  borrowingr. 
Although  the  total  debt  in  aid  of  railroads  issued  by  towns,  cities, 
and  villages  in  1872,  was  $26,946,662,  $10,416,864  had  been  issued 
^or  erecting  public  buildings,  $36,658,144  for  roads  and  bridges, 
$29,335,383  for  water  works  and  fire  apparatus,  and  $84,052,655 
for  parks,  local  improvements  and  other  purposes.  In  aggregate 
this  was  a  little  more  than  10  per  cent,  of  the  assessed  value  of  the 
property  of  the  state.^^  The  county  bonded  debt,  excluding  that 
of  New  York  City,  equalled  2.3  per  cent,  of  the  assessed  value, 
while  the  town  debt  of  416  bonded  towns  equalled  7.66  per  cent, 
of  the  assessed  value.  Some  towns  were  bonded  for  all  purposes 
to  as  much  as  20,  30,  or  even  50  per  cent,  of  their  assessed  value.^^ 
The  net  debt  of  the  city  of  New  York,  which  had  stood  at  $18,- 
901^440  in  1860,  had  increased  to  $73,373,552  in  1870,  and  to 
$116,773,724  in  1875,— an  increase  from  1860  to  1870  of  347  per 
cent.' and  from  1870  to  1875,  of  59.2  per  cent.^^  The  per  capita 
debt  of  New  York's  twenty-four  largest  cities  ranged  from 
$101.87  in  the  case  of  New  York  City,  to  $8.23  in  the  case  of  Co- 
hoes— an  average  of  $75.80,  while  the  average  per  capita  annual 


*  Lincoln,  C.  Z.,  Constitutional  History  oj  New  York,  vol.  2,  p.  358. 

"  ••Governor  Hoffman  in  1872  recommended  the  immediate  repeal  of  the  gen- 
eral town  bonding  law,  remarking  that,  'aid  has  already  been  given  to  rail- 
roads, upon  the  credit  of  municipalities,  to  quite  as  great  an  extent  as  Is  wise, 
and  in  some  instances  to  the  oppression  of  the  tax-paying  communities.'  "  Lin- 
coln, op.  cit.,  p.  557. 

^Ihid.,  pp.  559-560.  A  proposition  to  limit  the  aid  to  ten  per  cent  of  the 
assessed  value  of  a  municipality's  property  was  rejected  by  the  Commission. 
JUd.,  p.  560. 

2»  Constitution,  ISlfi,  as  amended,  art.  viii,  sec.  li. 

*»  Governor's  Message,  1872,  summarized  in  Lincoln,  C.  Z.,  Constitutional 
History  of  New  York.     vol.  2,  pp.  558-559. 

»  Ibid.,  p.  559. 

"The  Bankers'   Magazine,   Sept.   1876,    p.   182. 


[61] 


y 


62  BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 

tax  for  the  same  cities  equalled  but  $21.55.33  The  average  local 
indebtedness  of  New  York  state  was  estimated  at  11.3  per  cent, 
of  the  assessed  value  of  the  state  in  1880,  and  the  responsibility 
for  such  condition  of  aifairs  charged  to  nothing  ''more  nor  less 
than  an  abuse  of  credit.  Instead  of  being  compelled  to  go  to  the 
taxpayer  for  money  whenever  wanted,  the  city,  town  and  county 
officials  have  had  the  privilege  of  obtaining  funds  in  the  money 
market. '  '^^ 

It  is  not  strange  that  the  restrictions  on  further  railroad  aid 
failed  to  quiet  the  opposition.     The  desire  to  borrow  remained, 
and  new  avenues  of  expenditure,  together  with  fraud,  waste  and 
incompetency  in  public  life,  did  not  guarantee  against  a  continu- 
ation of  the  abuses.     The  movement  for  further  restriction  was 
revived  in  1876,  and  an  amendment   passed  by  the  legislature 
limiting  the  debt  of  local  units  to  5  per  cent,  of  their  assessed 
value.     But  the  Tilden  Commission,  which  had  been  appointed  in 
1875  to  consider  this  matter,  objected  to  such  an  amendment,  on 
the  grounds  that  it  could  be  evaded  by  raising  the  assessed  value 
of  property  to  which  the  ratio  of  debt  would  apply,  and  that  it 
served  to  prevent  ''wastefulness  and  embezzlement ' '  of  public 
funds  only  by  limiting  the  amount  "subject  to  depredation. ' '^^^ 
The  restriction  which  they  proposed  was  to  make  all  loans  de- 
pendent upon  laws  passed  by  a  two-thirds  vote  of  each  house.^* 
But  this,  it  seems,  was  ill-chosen  advice,  in  view  of  the  general 
distrust  of  the  legislature,  and  when  public  sentiment  for  some 
time  had  been  strongly  opposed  to  everything  which  savored  of 
special  legislation,  and  was  in  favor  of  fundamental  changes  by 
constitutional  method  only. 

Borrowing  power,  however,  was  based  upon  the  assessed  valu- 
ation of  property,  and  in  1883  an  amendment  was  passed  by  the 
legislature  which  fixed  the  amount  at  10  per  cent,  for  cities  and 
counties.  This  amendment  was  passed  the  second  time  1884, 
and  in  the  same  year  was  ratified  by  the  people  as  a  part  of  the 
constitution.     Thus  the  disposition  of  municipalities  to  play  with 

**  Bradstreers,  May   5,  1880,  p.    5. 

«  ^incoln,  C.  Z.,  Constittition  History  of  Neic  York,  vol.  2,  p    656 
"^  Ibid. J  p.  674.  f  k"        y. 

[62] 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


es 


debt  and  court  taxation  "as  if  for  pastime''  was  seemingly 
checked,  and  the  sentiment  expressed  by  Governor  Robinson  m 
1879  "that  debt,  both  public  and  private,  are  an  unmitigated 
evil"  was  given  expression. 

From  this  brief  summary  of  the  conditions  that  produced  the 
10  per  cent,  debt  limit  in  New  York  state,  the  conclusion  is  war- 
ranted that  the  restrictions  were  conceived  and  formulated  to 
meet  a  definite  issue  and  were  the  most  practical  remedy  possible 
at  that  time  for  meeting  the  situation.  Bradstreet's  had  voiced 
the  sentiment  clearly ;  against  an  abuse  of  borrowing  it  is  impos- 
sible to  provide  adequate  protection.  Sinking  fund  commission- 
ers and  other  devices  are  mere  pallatives  and  not  remedies.  The 
true  remedy  lies  in  constitutional  prohibition  against  further 
debt,  and  in  the  accumulaion  of  a  surplus  by  taxation  each  year 
to  pay  off  maturing  bonds.^^ 

There  can  be  but  little  doubt  that  the  constitutional  restrictions 
against  the  states  lending  their  credit  to  private  corporations  and 
associations  were  really  meant,  in  many  states,  to  include  the  sub- 
divisions of  the  state  as  well.  No  reason  is  evident  why  the  peo- 
ple of  the  constitutional  conventions  were  so  blind  as  not  to  see 
that  in  the  last  instance,  in  case  of  failure  on  the  part  of  subsid- 
ized private  capital,  financial  burdens  must  fall  on  the  taxpayers. 
The  taxpayers  for  the  state  were  the  taxpayers  for  the  localities ; 
the  personnels  were  precisely  the  same.  But  such  an  interpreta- 
tion of  the  intent  of  the  constitutional  provisions  though  valid, 
was  easy  of  escape  when  corporation  lawyers  were  seeking  some 
justification  for  governmental  aid.  Justice  Cooley  in  speaking  of 
the  Michigan  constitution  says,  "The  purpose  clearly  was  to  re- 
mand all  such  undertakings  to  private  enterprise,  and  to  protect 
the  citizens  of  the  state  from  being  taxed  to  aid  them ;  but  while 
the  state  was  forbidden  to  engage  in  such  works,  it  was  unfor- 
tunately not  expressly  declared  that  the  several  members  of  the 
state,  in  their  corporate  capacity,  were  also  forbidden  to  do  so. 
The  conclusion  sought  and  reached  was  that  the  agencies  of  the 
state  were  at  liberty  to  do  what  was  forbidden  to  the  state  itself, 
and  the  burden  of -this  debt  which  the  state  might  not  directly 


"  Bradstreet's,  May  5,   1880,  p.   5. 


[63] 


I 


«4 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


impose  upon  its  citizens,  it  might  indirectly  place  upon  their 
shoulders  by  the  aid  of  municipal  action. '  '^®    Like  confusion  has 
been  extended  even  to  the  present,  and  concerning  this  something 
will  be  said  later.    But  aid  was  being  sought,  and  in  the  fever  of 
•excitement  and  speculation,  it  was  given.    It  was  but  natural  that 
the  minor  divisions  of  the  state,  each  desiring  to  become  the  me- 
tropolis^* of  its  district,  and  realizing  that  growth  depended 
upon  transportation  facilities,  should  have  offered  the  induce- 
ments at  their  command  to  attract  private  capital.    Thus  the 
burdens  which  the  states  had  formerly  been  unwilling  to  bear 
the  municipalities  shouldered ;  thus  the   rivalry  which  in  the 
former  internal  improvement  craze  was  primarily  confined  to  the 
states  was  shifted  to  the  cities  and  the  counties,  etc. 

But  before  the  localities  could  extend  their  aid,  a  theory  of  tax- 
ation had  to  be  formulated  to  justify  their  contribution,  since  the 
-aid  given  ultimately  rested  upon  the  taxing  power.    A  cardinal 
rule  of  taxation  is  that  taxes  can  be  levied  only  for  public  pur- 
poses.   Are  taxes  levied  to  subsidize  private  corporations,  rail- 
roads or  otherwise,  levied  for  a  public  purpose  ?    In  brief  this  is 
the  argument  of  those  who  maintained  that  this  was  true.     Taxes 
can  be  levied  only  for  a  public  purpose.     Public  purpose  means 
public  benefit,  and  since  private  corporations  serve  a  particular 
district,  raise  the  assessed  value  of  property,  increase  the  re- 
sources of  the  state,  promote  happiness,  etc.,  it  is  the  duty  of  the 
state  to  encourage  them  by  any  means  which  she  may  have  at  her 
command.     If  the  state  can  aid  private  corporations  by  extend- 
ing to  them  the  rights  of  eminent  domain,  it  can  likewise  aid 
them  by  the  power  of  taxation.     The  benefits  are  common  and  re- 
turn to  the  state  through  increased  taxable  values,  thereby  in- 
creasing the  ability  to  bear  taxation.     If  this  is  true,  and  there 
is  no  doubt  that  a  great  many  people  thought  it  to  be  true,  then 
the  whole  thing  is  true  ''political  economy. '*    If   the  state  re- 
ceives the  benefit  from  such  taxation,  then  the  enterprise  is  of  a 
public  character,  and  taxes  levied  therefor  are  for  public  pur- 

"Cooley,  Thomas  M.  Constitutional  Limitations.  Fifth  Edition,  p  265 
Vide,  also  Dissenting  Opinions  of  Justice  Kinney  In  "Dubuque  Co.  vs.  Dubuque 
Railroad  Company,"  4  Greene  1,  (1853). 

*>  Vide,  Ohio  Constitutional  Debates,  1873-74,  vol.  2,  pt.  2,  1435. 

[64] 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


65 


poses.  Public  purpose  or  public  use  was  made  to  mean  or  in- 
volve public  good.  Indeed,  the  terms  were  often  used  synony- 
mously, and  on  the  basis  of  this  confusion  railroads  and  other  pri- 
vate enterprises  were  freely  subsidized.*"  The  whole  argument 
was  put  on  the  basis  of  benefit  to  be  experienced.*^  The  justifi- 
cation of  taxes  was  benefit  to  persons  through  property. 

The  weakness  of  the  ''benefit'^  argument  was  not  difficult  to 
see  and  its  fallacy  was  often  pointed  out.  The  argument  had  re- 
ceived its  vogue  largely  from  a  Pennsylvania  case  in  1853  in 
which  the  court  used  the  following  words :  * '  I  am  of  the  opinion 
that  a  tax  must  be  considered  valid,  unless  it  be  for  a  purpose,  in 
which  the  community  taxed  has  palpably  no  interest ;  where  it  is 
apparent  that  a  burden  is  imposed  for  the  benefit  of  others,  and 
where  it  would  be  so  pronounced  at  first  blush.*'  *-  The  public 
interest  in  a  railroad  corporation  was  held  to  be  as  intense  when 
the  railroad  was  privately  owned  as  when  publicly  owned,*'  be- 
cause travel  and  transportation  were  cheapened  to  a  degree  far 
exceeding  the  charges  of  every  kind,  and  in  addition  to  these  ad- 
vantages there  were  added  those  of  ^'rapidity,  comfort,  conven- 
ience, increase  of  trade,  opening  of  markets,  and  other  means  of 
rewarding  labor  and  promoting  wealth. ' '  ** 

Among  the  eminent  judges  who  dissented  from  the  reasoning  in 
the  Sharpless  case  and  the  policy  to  which  it  gave  countenance, 
there  is  probably  no  more  illustrious  example  than  Judge  Cooley 
of  Michigan,  who,  in  an  important  case,*^  ''had  the  independence 

*>It  was  largely  on  such  reasoning  that  the  Ohio  court,  in  spite  of  Constita- 
tlonal  prohibiiion  in  Ohio  against  town  and  cities  "aiding  railway  companies," 
held,  in  "Walker  v.  The  City  of  Cincinnati,"  21  Ohio  N.  8.  U,  that  Cincinnati 
was  competent  under  a  legislative  act  to  build  a  railroad  from  Cincinnati  to 
Chattanooga  at  a  cost  of  $10,000,000, 

**  Vide,  American  Law  Register,  vol.  xi,  p.  742  (1872)  where  this  argument 
is  stated  and  refuted.  Vide,  "The  State  of  Iowa  ex.  rel.  v.  The  County  of  Wa- 
pello," IS  Iowa,  S88  (1862)  ;  "The  People  v.  Salem,"  20  Michigan,  i52,  501.  Par- 
ticular  notice  should  be  given  to  the  opinion  of  Justice  Christiancy. 

*»  "Sharpless  v.  The  Mayor  of  Philadelphia,"  21  Penn.  State,  147.  p.  168. 
(1853).  . 

*»  "The  right  to  tax  depends  on  the  ultimate  use,  purpose  and  object  for  which 
the  fund  is  raised  and  not  on  the  nature  or  character  of  the  person  or  corpora- 
tion whose  immediate  agency  is  to  be  used  in  applying  it."     Ibid.,  p.  169. 

**  "Sharpless   v.   The   Mayor    of   Philadelphia."   21   Penn.   State,   W,    p.    169 
Vxde,  also  an  article  by  "Cecil"  In  The  American  Law  Register,  Vol.  2,  p.   l] 
where  the   holding  in   this    case  is   severely   criticized.     In    the    same  journal 
"^01.  9,  p.  669,  the  essential  contentions  of  the  Sharpless  case  are  upheld. 

**The  People  v.  Salem,"  20  Michigan,  ^52.     (1870). 

[65] 


I!  I 


*. 


ee  BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 

and  courage  to  make  an  unpopular  decision '  '^*  in  a  case  involving" 
essentially  the  same  particulars  as  the   Sharpless   case   above. 
Judge  Cooley  dwelt  at  length  in  this  case  upon  the  growing  oppo- 
sition, popular  and  legal,  to  railroad  and  other  aid,  and  pointed 
out  that  because  of  the  difficulties  of  building,  and  of  the  neces- 
sity of  aid  for  canals  and  turnpikes  in  the  early  period  of  the  na- 
tion 's  growth,  these  avenues  of  commerce  had  come  to  be  spoken 
of  as  general  utilities.     Even  the  courts,  looking  for  some  justi- 
fication for  the  aid  to  railroads  that  was  being  countenanced,  had 
** carelessly''  said  that  they  must  be  regarded  as  ''agents  of  the 
states. "     ''  But  such  saying  does  not  make  them  such, ' '  continued 
Judge  Cooley.    Aid  to  them,  when  furnished  from  general  taxes, 
is  unconstitutional,  unjust  and  illegal,  because  taxes  are  not 
levied  for  a  public  purpose.     Incidental  benefit,  he  maintained, 
is  an  insufficient  test,  and  one  that  would  equally  as  well  apply 
to  a  newspaper,  a  hack  line,  or  any  other  contrivance  which  re- 
dounds to  public  welfare.     To  him  a  public  purpose  for  which 
taxes  can  be  levied  has  **no  relation  to  the  emergency  of  the  pub- 
lic need,  or  to  the  extent  of  the  public  benefit  which  is  to  follow. 
It  is,  on  the  other  hand,  merely  a  term  of  classification  to  distin- 
guish the  object  for  which,  according  to  settled  usuage,  the  gov- 
ernment is  to  provide,  from  those  which,  by  like  usage,  are  left 
to  private  inclination,  interest  or  liability."*^     The  essential  sim- 
ilarity of  the  right  of  eminent  domain,  conferred  upon  a  corpora- 
tion, with  the  right  to  public  aid,  contended  for  by  the  support- 
ers of  public  subsidies.  Judge  Cooley  denied,  and  maintained  that 
when  land  is  taken  under  the  right  of  eminent  domain  it  is  paid 
for  and  the  state  loses  nothing ;  but  when  taxes  are  levied  for  the 
aid  of  corporations  which  carry  on  their  works  for  their  own 
ends  and  advantages  they  are  levied  not  for  public  but  for  private 
purposes  and  are,  therefore,  illegal. 

This  decision  came  at  a  time  when  the  fever  of  excitment  was 
at  its  highest,  and  was  * '  anxiously  awaited  by  the  legal  profession 
and  the  public  alike.''    In  Michigan  it  served  the  purpose  of  a 

^  Comment  of  The  American  Law  Register,  vol.  ix,  p.  501 ;  Vide,  favorable  com- 
ment on  this  case  in  Central  Law  Journal,  vol.  36,  pp.  133  fla.  Opposing  points 
of  view  are  found  in  the  American  Law  Register,  vol.  9,  (N.  S.)   pp   649-670 

«The  People  v.   Salem,  iO  Mich.  452,  p.  458. 

[66] 


SECRI ST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


67 


constitutional  provision  against  state  subsidy  and  its  influence 
dominated  the  history  of  Wisconsin  and  Iowa,  and  other  states  for 
some  time. 

The  experience  bf  Wisconsin  illustrates  how  much  the  consti- 
tutional limitations  on  local  debt  grew  out  of  the  particular  exig- 
encies of  the  times.  In  an  important  case*®  doctrines  of  bene- 
fit in  the  matter  of  public  aid  and  the  essential  similarity  of  the 
right  of  eminent  domain  with  that  of  public  subsidy  were  denied 
by  the  Supreme  Court  and  held  to  be  insufficient  to  justify  the 
use  of  the  taxing  power  in  the  aid  of  private  corporations.  Pub- 
lic use  was  made  to  imply  possession,  occupation,  etc.,  by  the 
public  or  by  public  agencies,  and  not  merely  incidental  benefit. 
The  public  use  in  a  privately  owned  and  privately  managed  rail- 
road was  held  to  be  a  partial,  qualified  public  use  which  would 
of  itself  not  justify  taxation  in  its  behalf.  The  lending  of  credit 
to  railroads  was,  therefore,  illegal,  because  taxes  were  not  levied 
for  public  purposes.  The  interpretation  of  this  controverted  ques- 
tion by  the  court  was  made  almost  simultaneously  with  the  hold- 
ing in  the  Michigan  case  cited  above,  and  tended  to  strengthen 
the  contention  of  the  opposition.  But  the  whole  matter,  so  far 
as  Wisconsin  was  concerned,  was  reopened  and  the  holdings  in 
this  important  case  negatived,  by  the  decisions  of  the  state  su- 
preme court  in  Lawson  v.  Milwaukee,  etc.,  Railroad,^**  and  in  Ole- 
son  V.  The  Green  Bay  etc..  Railroad.^®  With  subsidies  to  private 
companies  legalized  the  financial  conditions  of  municipalities 
passed  from  bad  to  worse.  The  governor,  in  his  annual  message^ 
January  11,  1872,  said:  *'As  a  temporary  measure  of  safety,  I 
recommend  the  passage  of  a  law  prohibiting  any  town,  county  or 
city  from  creating  any  debt  in  aid  of  any  railroad  or  public  im- 
provement  in  excess  of  five  per  cent,  of  the  assessed  value  of  the 
property  of  each  town,  county  or  city,  and  that  an  amendment  to 
the  constitution  to  the  same  effect  be  submitted  at  the  earliest  pos- 
sible moment."  A  joint  resolution  to  this  effect  was  passed  by 
the  succeeding  legislature,  and  a  constitutional  amendment  limit- 
ing the  debt  of  localities  to  five  per  cent,  of  the  assessed  valuation 


*«  "Whiting  V.  The  Sheboygan  Railway  Co.,"  25  Wis.  167,  (1869-1870). 
"SO  Wis.  597,  (1872). 


'56  Wis.  383,  (1874). 


[67] 


I 


SECRI  ST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


69 


68 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


of  their  taxable  property  was  adopted  by  the  people  and  added  to 
the  constitution  in  1874.^^  The  constitutional  measure,  however, 
did  not  prohibit  municipalities  from  lending  their  credit  to  or 
subscribing  to  the  stock  of  private  corporations,  and  such  a  pro- 
hibition is  not  now  contained  in  the  constitution. 

Iowa  imposed  a  five  per  cent,  debt  limit  on  her  municipalities 
in  1857,  but  failed  to  have  such  limitations  cover  the  matter  of 
lending  credit,  etc.     This  restriction  was  vigorously  pressed  in 
the  constitutional  convention ;  but  total  prohibition  seemed  out  of 
the  question,  and  as  no  percentage  relationship  of  debt  to  assessed 
value  of  property,  agreeable  to  all,  could  be  decided  upon,^^  the 
matter  was  dropped,  notwithstanding  an  attack  upon  the  whole 
system  of  public  aid  made  by  the  governor  in  ISSG.*"*^    An  imme- 
diate cause  of  the  five  per  cent,  restriction  seems  to  have  been  the 
insecurity  and  lack  of  confidence   which  foreign  investors   felt 
with  respect  to  their  loans  when  each  municipality  could  issue 
its  own  bonds  to  private  companies  or  promise  to  pay  the  interest 
of  bonds  issued  by  them  almost  without  limit  save  that  which  was 
set  by  the  continual  rebuke  of  the  more  cautious  members 
of  the  communities.     Unfortunately  this  element  was  almost  al- 
ways a  minority.     The  real  and  underlying  cause,  however,  was 
here,  as  elsewhere,  to  guarantee  against  excessive  taxation.     Sub- 
scription to  private  companies  was  more  stubbornly  opposed 
than  were  the  direct  expenditures  of  municipalities  themselves 
for  the  same  thing,  because  of  the  greater  abuse  of  the  taxing 
power  to  which  it  led.     All  restrictions,  however,  grew  out  of  the 
association  of  debt  with  the  taxes  necessary  to  pay  the  interest 
and  to  expunge  the  principal.     Taxes  supported  credit,  and  in 
order  to  reduce  taxation  it  was  necessary  to  reduce  the  amount 
that  could  be  borrowed."     That  there  was  no  universal  protest 
against  railroad  aid,  per  se,  is  evidenced  by  the  failure  to  pro- 


"*  Constitution,  art.  xi.  sec,  3. 

"  Vide,  loica  Constitutional  Debates,  1857,  vol.  1,  pp.  421-423,  where  the 
percentages  6,  7,  8,  9,  10,  and  11  were  rejected  by  close  votes.  Vide,  also  the 
same  volume,  p.  810,  where  the  principle  of  prohibiting  public  aid  to  private 
companies  was  rejected. 

"^'Annual  Message,"  Dec.  2,  1856,  in  Shambaugh,  B.  F.,  Messages  and  Proc- 
lamations, etc.  ,  vol.  2,  pp.  37  flB. 

'^Vide,  "Spilman  v.  Parkersburg,"  U  8.  E.  Rep.  279  (1891)  (W.  V.);  "Attor- 
ney General  v.  Pingree,"  120  Mich.  559,  (1899)  ;  McNett,  Wm.  "Meaning  of  In- 
debtedness." etc.,  Iowa  Bar  Association  Reports,   (1903),  pp.  116,   127,  128. 


hibit  it  at  this  convention.  The  principle  was  vigorously  attack- 
ed*^ but  the  opposition  lacked  the  requisite  strength  to  insert  a 
direct  prohibition  in  the  constitution.  But  by  1862,  the  people 
had  become  so  aroused  by  the  iniquity  of  the  practice,  that  the 
Supreme  Court,  in  response  to  public  sentiment,  overruled  a 
former  decision,'^®  and  forbade  municipalities  to  subsidize  private 
capital  in  any  form.^^  This  decision  was  reinforced  in  1869 
when  the  court  refused  to  draw  any  distinction  in  principle  be- 
tween lending  credit  to  and  subscribing  to  the  stock  of  private 
companies.  Both  practices  involved  taxation.  The  essential 
contentions  of  the  court  were  that  taxes  were  necessary  to  sup- 
port credit,  and  that  the  taxes  collected  were  given  to 
private  companies.  This  was  held  to  be  illegal  because  of  the 
*  *  coerced  contribution ' '  involved,  and  to  be  in  opposition  to  that 
provision  of  the  constitution  ^'that  no  man  shall  be  deprived  of 
his  property  without  due  process  of  law."  Taxes,  it  was  held, 
**are  burdens  or  charges  imposed  by  the  legislative  power  upon 
persons  or  property  to  raise  money  for  public  purposes,  or  to  ac- 
complish some  governmental  end."^^  But  the  principles  so 
forcefully  expressed  by  the  court  in  the  following  words  were  in 
the  next  year  repudiated.^®  *'If  anything  can  be  said  to  be  set- 
tled in  this  state,  it  is,  that  under  the  constitution,  there  is  no  leg- 
islative  power  to  endow  public  or  municipal  corporations  with  the 
faculties  of  subscribing  to  the  stock  of  a  railroad  company  and  to 
levy  a  tax  on  the  inhabitants  to  pay  for  it. '  ^^^  Thus  in  Iowa  the 
way  was  opened  up  for  further  local  debt  the  aggregate  of  which 


[68] 


'^Vide,  Iowa  Constitutional  Debates,  1857,  vol.  1,  p.  291,  where  the  disas- 
trous experience  of  Pennsylvania  is  cited.  On  p.  298,  Ohio's  constitutional  re- 
striction of  1851,  is  strongly  approved.  In  another  place,  the  advancement 
of  the  interests  of  the  state  by  building  railroads  out  of  borrowed  funds  handed 
over  to  private  individuals,  is  held  to  be  as  impossible  and  impracticable  as  cul- 
tivating oranges  profitably  in  a  hot  house,  p.  333.  An  excellent  summary  of 
the  proceedings  of  the  constitutional  convention  of  Iowa  in  1857  is  given  by 
William  McNett  in  "What  should  be  deemed  Indebtedness  within  the  Meaning 
of  the  Constitutional  and  Statutory  Provisions  Limiting  the  Amount  thereof 
which  Municipalities  may  Incur."  loica  State  Bar  Association  Reports,  1903, 
pp.   118-127. 

""Dubuque  County  v.  Dubuque  and  Pacific  Railroad  Company,"  4  Greene,  1 

(1853). 
""The  State  of  Iowa  ex.  rel.  v.  The  County  of  Wapello,"  IS  Iowa,  S88  (1862). 
""Hanson  v.  Vernon"  «7  Iowa,  28  (1869). 

""Sewart  v.  The  Supervisors  of  Polk  County."     SO  Iowa,  9   (1870) 
••"Hanson  v.  Vernon,"  27  Iowa,  28. 

[69] 


( 


I       i 


70  BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 

1  qLT^^*^^^'  ^^^^^^'  ^""^  ^^^""^  "^^^  approximately  $6,000,000  in 

We  have  briefly  cited  the  experience  of  Michigan,  Wisconsin 
and  Iowa,  together  with  the  holdings  in  the  three  contemporan' 
eous  decisions  of  their  respective  highest  courts,  as  further  evi- 
dence of  the  attitude  of  mind  of  the  period  toward  municipal 
debt.    In  no  one  of  these  states  were  constitutional  prohibitions 
inserted,  but  public  sentiment  against  the  abuses  which  had  be- 
come so  flagrant  was  given  expression  to  through  the  ruling  of 
the  courts.    Prom  what  has  been  given  the  conclusion  seems  war- 
ranted that  the  wave  of  public  indignation  over  the  abuses  of 
loca   debt  was  justified.    The  abuses  can  be  traced   to  an  un- 
healthy industrial  and  commercial  expansion,  to  the  practice  of 
deferring  tax  burdens  to  the  future,  and  to  the  waste  and  corrup- 
tion which  It  permitted.    Many  of  the  burdens  which  ultimately 
lell-and  in  some  cases  with  such  force  as  to  almost  depopulate 
certain  distncts-were  so  far  discounted  through  the  perspective 
of  increased  land  values  and  growing  cities,  that  they  appeared 
to  be  positive  blessings.    But  the  time  of  reckoning  came  with 
the  crisis  period  and  the  results  were  the  restrictions  about  which 
we  write. 

Out  of  this  general  opposition  to  subsidies  to  private  capital 
or  coincident  with  it,  arose  the  companion  provisions  which  limit 
the  total  debt  to  a  percentage  of  the  assessed  value  of  property 
Formerly,  the  control  of  local  debt  had  been  left  to  the  legislature 
under  some  such  general  constitutional  provision  as  the  follow- 
ing:   The  general  assembly  shall  provide  for  the  organization  of 
c  ties,  incorporated  villages,  etc.,  and  shall  restrict  their  powers 
of  borrowing  money,  contracting  debt,  etc.,  so  that  they  shaU  not 
be  abused.    We  have  seen  how  New  York  imposed  a  ten  per  cent, 
hmit  upon  cities  and  counties  in  1884,  and  how  Wisconsin  im- 
Posedafive  per  cent,  limit  in  1873.    Georgia  imposed  a  seven  per 

"The  county  debt  which  was  reported,  equalled 
^    The  city  and  town  debt  reported,  equalled  .!^  ^  i  i ! !  i ! ! ! ! ! .' ." ! ! ! ' '  2  690  «* 

Total     

?3.932,02T 

•  .  «.  !«.,  Messages  and  Proclamations,  vol.  2,  pp.  301-302. 

[70] 


SECRIST-RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


71 


cent  limit  in  1877,  Pennsylvania  a  seven  per  cent,  limit  in  1873, 
Maine  a  five  per  cent,  limit  in  1878,  Indiana  a  two  per  cent,  limit 
in  1881,  West  Virginia  a  five  cent,  limit  in  1872,  etc.  Re- 
strictions of  one  type  or  the  other  have  limited  the  fields  of  mu- 
nicipal  activity,  and  slowly,  with  the  rise  of  independent  private 
capital  and  the  increase  in  the  stability  of  industry,  municipali- 
ties have  practically  ceased  to  guarantee  the  success  of  private 
endeavor.  Their  expenditure  and  the  causes  of  incurring  debt 
have  been  extended  in  other  directions,  and  of  these  something 

will  be  said  later. 

To  summarize :  The  period  1865  to  1880  was  above  all  a  period 
of  industrial  expansion.     Railroads  were  just  coming  to  be  looked 
upon  as  the  great  revolutionary  method  of  transportation.     Dif- 
ferent sections  of  the  country  were  actively  competing  with  each 
other  in  holding  out  incentives  for  railroad  expansion.^^"     Private 
capital  sometimes  needed  a  stimulus  to  engage  in  undertakings, 
the  returns  from  which  would  be  realized  far  in  the  future,  if  at 
all.'^    The  necessity  for  aid  was  often  unreal  but  was  not  severely 
questioned  until  the  time  of  the  financial  pressure  of  the  early 
seventies.     That  the  loss  of  a  public  guarantee  tended  to  check 
railroad  expansion  there  can  be  no  reasonable  doubt,**  but  that 
adequate  transportation  would  not  have  been  furnished  .without 
wholesale  abuse  of  public  credit  is  likewise  beyond  doubt.    More- 
over, this  was  a  period  of  rapid  city  growth,  and  many  new  uses 
for  borrowed  funds  were  being  developed,  uses  about  which  agri- 
cultural communities  knew  scarcely  nothing.     Municipal  corrup- 
tion«=^  was  fiourishing  under  the  spoils  system,  and  one  is  not  sur- 
prised to  find  that  the  majority  of  debt  outstanding  in  1880,  is- 
sued  between  1860  and  1880,  belonged  to  the  larger  cities.     The 
following  diagrams  show  graphically  the  debt  for  state  and  minor 


"The  percentage  increase  of  railroad  mileage  of  the  United  States  from 
iS7a_i880  was  76.28;  that  of  1880-1890,  75.35. 

«VLe  the  arguments  in  the  Ohio  Constitutional  convention  of  1873  in  favor 
of  removing  the    restrictions  on   municipalities   lending  their   credit.     Debates, 

vol    2    Dt    3.  pp.  2519,   2608.  •  ^  ^       . 

«  The  percentage  increase  of  railroad  mileage  for  the  eighteen  states  impos- 
ing constitutional  restrictions  on  municipaltes  lending  their  credit,  etc.,  be- 
tween 1870  and  1880  was  70.40 ;  for  18S0  to  1890.  66.50.  The  Percentage  in- 
crease  for  the  same   periods  for  all  the  states  were,    respectively,    <6.28  and 

75.35.  . 

"Adams.  H.  C,  Public  Debts,  pt.  Ill,  chap.  IV. 

171] 


I 


72 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


civil  divisions  outstanding  in  1880,  issued  between  1860  and  1880 
as  compared  with  the  debt  of  cities  with  population  over  7,500  for 
the  same  conditions. 

Administrative  machinery  was  undeveloped,   the  legislatures 
had  failed  to  check  municipal  extravagance,  and  the  causes  of  debt 
were,  in  part,  at  least,  of  such  a  character  that  home  rule  was  im- 
practicable.    Kailroads  restricted  to  one  town  or   a  few  towns 
were  almost  worthless;  even  those  limited  to  counties  were  com- 
mercially inadequate  unless  their  terminals  were  in  recognized 
markets.     Grants  of  aid  by  one  civil  division  were  of  little  value 
unless  followed  by  like  grants  from  contiguous  units,  and  so  the 
evil,  as  it  were  by  a  process  of  accumulation  and  neccessity 
spread  throughout  the  states.     State  control  was  the  only  pos' 
sible  way  to  cope  with  the  difficulties,  and  constitutional  prohibi- 
tion  seemed  the  only  valid  and  conclusive  remedy  to  administer 
That  the  restrictions  should  extend  beyond  subsidies  is  patent 
In  whatever  way  debt  was  incurred  it  was  deU,  and  it  was  this 
from  which  escape  was  sought.     The  particular  nature  of  the 
cause  of  suffering  was  subsidiary  to  the  general  effect 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


73 


■  -«••■     ■■■•^    '.  ■•«••••■•■■■■■•■«■««•■•■■■••«■■■■•*■■■•■«■■«•■«■■•■■■•■■■•■•••■••■■■■«■«■■•■«■■■■*•■•■•«■«■••■>    ■■■■■;*** ^f*"S**!*SSSS£SSSSSSS££!Iu2!C 

(•■■ft    ^ftaas*.     ••■■■■■■■•■■■•■■■■■■■■■■••■■■■•■■•■■•■••■••■■mnBBiaB«aaaa««aB«««««aBaaasBBBa*«BSBaa»aa*««aaB«'"*a*;f2**'*********"***?*2.iiS.II»I>a 

■  ■•■•■■■■.  -•■•■>>•.    •■••aaaaaaaaaaaaaaaaaaaaaKaaaaaaaaaiaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaacaaa*    aa. ■•■■■■  ■••  I=*=!5f llSSiSIIiiSiSiililSI 

■  ■•■••■•■■ft    «■■■■■■■■.  -■■aaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaBaaaaaaaaaaaaaaaaft  laa-  aaaaai  *■'**;■**■*"■**"***"*****"*** 

■  ■■■■• •.  -■■•••■■•■•. -laBaBaaaaaaaaaaBaaaBaaaaaBaaaaaBaaaBBaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaavaaaa-     ■••»*••»'■ -tZl^ZZZ^tttmZZlZZ^llllZZll 


•  ■■■•■••aaaaaaaaaa'  aaaaaaaaaaaaaaa'  .aaaaaaaaaaaaaaaaaaaaaaaBaaaaaBaaaaaaaaaaaaaaaavaaaaaaaBaaaaaBBBaaBBaaaaaa*  ■•  •••■•?•! •'■"■••••"••"!l""!l";iS!irir 

•  ■■■aaaaaBaaaaaBB^  «*«aaBaaB*«BaBr    ••■••• •••••■•••■•aaaaaBBaaaaaBBaaaaaaaaaaaaaBaaaaaaBBaBaBBBBaaBBBaaaaaaaaaaaaaBBBBaaaa   -  aaaasaaaaavMaBaaasaaaaBaB*' 

■  ■aaaaaaaaaaaaaaa'  aaaaaaaaaaaaa    ^aaaaaaaaaaaaBaBaaaaaaaBaaaaaaaaaaaaaaaaaaaaaavaaavaaanBBaBaBasaaaaaaBaaaaaaa  -'*■**■■■?    iSriiliiiliiii-ii.ii.-SIiSiii 

•  ■■■aaaaaaaaBaaaf  iaaaaaaaaaaa' .aaaaaaaBaaaaaaaaaaaaaaBaaaaaaaaaaaaaaaaaaaaBaaaaaaaaaaBaBBBaBBaaaBaaaaaaaaaaaaB    '•■•*•*••*•■•■*•**■■■■;*■*■■?**■****■■* 

■  ■■"aaaaaaaaaBBa    aaaaaBBaaa-' .aaaaBaaBaBaaBBBBaBaaB^aBBBBaaBBaBBBaaaaaaaaaaBaaaaaaaaaaaaaBaaBaaaaaaaaBaBaaBaaaa  •■aaaaaaaa--  ;■■;§;*■?***■■■;*■  ?f  ?*■*!"! 

•  -■koaaaaaaaaa*  aaaaaaaaa^    aaaaaaaaaaaaaaaaaaaBaaaBBaaaBaaaaiaBaaaaaaaaaaaaaaaaaaaaaaBBaaaBaaaBaBBBaaaaaaaaBBa*' ■*****■***********"****'************** 


•  ■«.  aaaBaaaaa-  aaaaaaaa'  aBaaaaaaaaaaaaaaaaaaBaBaaftaaaaaBaaaaaaBaaaaaaaaaaaBBBBaaaaaaasaaaaaaaaaaaaaaaaaaaBaaaBB    -  -aaaaaaaBaaaaaaBa^^Baaaaaaaftaaaaaaaaa^ 

•  ■■aiaaaaaaav jaaaaaaap  jaBaaaaaaaBBaBaaaaaaBBaiaaBaBBaBBaBaaaaaBBBBBaaa BaaaBaaaBaaaaaaaBBaaaBBBaaaaaBaaaaaBBBBa   '••■••■■■■-•*£■**■*■■*?■■■■■;*■***■**!*" 

•  aaaaaaaaaaa  .aaaaaaaa- aaaaaaaaaa aaaaaaaa ■BaaaaaaaB8aaaaaaaaaaaaaaaaaaBaaBBaaaaBaaB«Ba»aaBaaaaaaaBaaaaaaaBB«aBa*-aaaaaaBa.. •■■******'***""?V!!S!  ..t!! 
•aaa^aaBaaa' aaaaaaa»» aaaaaaaaa aBBBBBaBBBBBaBaBaaaBBBaaaaaaBa aaaaaaaaaa ■aaBaaaBBaaaBaaBaaaaaaaaaaaaaBaBBaaaaaaaaaaaaaaaaB-- aaaaaaaa ■■aaa ••••••• aaapaaaB 

■  aaaaaaaaaa  laaaaaaaa  .aaaaaaaaa aaaaaaaaaa aaaaaaaaaa aaaaBaaaaaaaaaBaaaaaasaaaaaaaaaaBaBaBBBaaaBBBaaaaaaBaaBaaaaa  ■  aaaaaaaa .**■*■§**■**■■■*■****■"■'?"* 
■■■  •aaaaa-aaaaBaaBfJBBaaaaBaaaaaaaaBBaaaaaaaaaaaaaaaaaaaaaaBaaaaBaaBaaBBaaaaaaaaBaaBBaBaaaaaBBaaaaBBsaBaaaaaa  Baaaaa' a ■•aaaaaaaa aaaaaaaaaa •■■•••a^aB 
•■BBBaBsaa«aaaBaaBa' aaaBaaaaaaaaBBBaaBBaaBBaBaaaBaaaaaaaBBBBaBBBaaaaaaBaBBaaaBBaaBBBBaBaBaaaaaaBBaBaaaaaBaaBBaaaaaaaaaa-aaaBBBaBBa aaaaaaaa ■••■■••■•••• 
I     __aaaa'     laaaaBBarjaaaaaaaaaaaaaaai-aaaaaaaaaaaaaaaaaaaaaaaBaaaBaaaBBaaaaaaaaBasaaBBaBaBBaaaaBaaaaaBaaaaaBaara    •  aaaaaaaaa aaaaaaaaaaaaaaa**** ■■■••••■■• 

■  «aaaaaa       ^aaaaaaab    aBaBaaaBaaaaBaaaaaaaaaaa«aaaaaaaaaBaa»B«aaaBBaBaBaa8aaaaBaaaaBBBBa««BBaBaaBBBaaaaasaBaBBft-«»aBBBaaa»  a>  a laaaaaaaaaaaaaaa •■•*••■•••< 

■  ..aaaBBB    BBaaaaaBa.-'BaBaaBaBaBBaaBBBaBaBaBaaBBBaaaaBBBBaBaaBaaaaaBaaaaBaaBflaBaaaBBaaBBBBBBaBaaaaaaaaaar    ^aBa**--aaBaBft ■■  • ■aaaaaaftaaaaaaaa <*->■••>■ -■ 

■  „ aaaaaaaaa    aaaaaaaaaa.  ^aaaaai aaaaaaaaaa aaaaBaaBaaaaaaaaaaaaaaaasasBBaaaaaBaaBBaaBaaaaaaBB aaaaaaaaaa ■aaai  •■  mm*  ■*  ••  aasaaa-  *•;■?;■*•■■?■■*""***"*'*■"* 

■  aBBaaaaaaaa  -•aaaaaBBaBa  -aaasaaBBaaaBB8BaB«aaaas«aaBaaBaBBaa««B»«aBaaaB«BBaBaBaaBSBaBBaa«BaaaaBaaaaaaBaa-'.aaBa  «•  «>  aaaaaa  ■>  «•■■■*■■■■*■■■■"'■*"■"**■**■■ 

■  aaaiaaaaaaaa  'aaaaaaaaaaa^ - a aa aaaaa a aaaa aaa aa a aaaaaaaaaaaBsaaaBaaaaBaaaaBasBBBaaaaBB a aaaaaaaBa a aaaaaaaaa    ■     ^aa-   .k^aaaaaa      .aaaaaaaa ■aaaaaaaaa ■■>■■■■•■• 


•  ■aaaaaaaaaaaaa  •aaaaaaaaaaaaa. *aaaaaaaaaaaBaaaaaaaaaaaaaaaaaBaBaaaBBaaaaaaaaaaaaaBBaaaaaaa ■aaaaaaaaa aaaaaaaaaa       aaaaaaaa       "*B!!:*!t****"!!!;f ■"*!*!*■ ' 
■  ■a    ^aaaaaaaaaaa  ^•aaaaBaaBsaaa*  -aBaaaBaaa8«aaaaa8aaa8aaaaaBa«aaaB«saa8aaaaBBaBaaBaBBBaBBBaaBaaaBaaaa(.aB»aa»^a8--BSBaBaaa  .'•■••■■  b******;*;*** ■*-■***■** 


■  ■.._  aaaaaiaaaaaaaaeft  ^aaaaaaaaa•aaaBB  'aBaaBaaaBaaaaaaaaaaaaBBaBBBBBBaBBaaaaaaBaaBaBaaaaBaBsaaBaaaaBaaaaaBft  •■   taa    _    ■••mbb  j^aaaaBaaa«aaBafta*ftBB**a>*««*> 
■aaaaaaaaaaBeaBBBaaaa '•aaaaaaaaaaaaa Bi  aaaaaaaaaaaaa aaaaaaaaaa a«»Ba«aa«aB8BaBBaaBaKBaaaBBBaBaBB«88aaBaaaaaB. a ibb^^bbbbbbh    iBBaaBaBaBaaaaaaBaa •■•■■••■•• 

■  aBBBaaaaaaaaaaaaB«aak«laBaaaBBBaBaai aaaaBaBaaaaaaBBaaaanaaaBaBBaBBBaaaBBaaBBBBaaaaBBBaBBaaaaaaaBaaaaaaBaajaa .    aBBaaaaa  •• ■aBBaaaaftaaBaaafta^ ■■■■■■•■•* 


■  ■aBaaaaBaBaaBBBBBBaaaak  ^vaBBaaaaaaaa  ■BaaaaBBBaaaaaaaBaBaasaasaaaaaaaaaaaaBaBaaaBaaBaaaBaaaaBaaaaaaaaaaBi  —  aaa . 
■■ar-aBaaiBBaaaaaBaaaaBBft^aaaaaaaaaaa' BaBBaBaBaaBBBaaa8eaaaBaaBs«aB8BBaaalaBsaBaaaaaaBaaaBaaBBBaaaaBBBSM»aaaa 

■a8aftjaaaaBaaaaBBBaa8aBBB«>^BaaBaaaaaB«aBaaBBaaaaBaaaaflBaBBB«asaBBaBBBaBBBBaB*aBaaa«saaaaaaaBaBaaBaBBBaas*       aaa. 

■  I  ..iaaaaaBaaaaaaaaaaaaaBak'*BaaaaBaBaa\aaaBaaaa8aaaaBaaaaBBaBaaB«B«B««BBaaaE«aBaaaBa8aBaaaBBaBaBB8aaaaaai  ta  lat  ' 


■  r-    «aaaaaaBaaaBaBBBaaBaaaai •      ■aaaaaaat ■■■■■••■■Baaaaaaaaaaa aaaaaaaaaa aaBaaBaaaaaaaaaaaaaBBaaBaBaBaaBaaBBBBBaa.  —  yaaaaaa  .    aaaaaaaa aaaaaaaaBaaa ■•■■■■• 

ak        ■■aaBaaaaaaBBBBBaaaaaaaa  .aaaaaaaaaa  -aaaaaaaBBaaaaaaaaaaaaaaaBaasaaaBBBBaaaBaBaBBBaaBaBBBBaaaaaBaaaaa  -aBaB8"«aBaaBaaa jwaaaaaraaaBa aaaaaaaa aaa a Baaaa 


■  aaaaaaaaaaaaaaaaflaaaBaaBaa  iBaBBaaaaasaBBL  aBaaBaaaaaaaaBBBBaaBBBaBaaaaaBaBaBBaaaaaBaaBaaBak.' ^aaaaBaaaaaa-raBa  "  aaa--aaB»*  >8aaBaaBaBaBaaBaaB aaaaaaaaa ■ 
•  aa&  ^aaaaaBaaaaaaaaaaaaaaa* ■BaBaBaaaaaaaaa  fBaaaaaaaaaaaBBBiaaaaBaaaaalaaaiaBaaBBaaBaaBBBBa-waaaaaaaaaaaaa •.  i  sahtfaaaai aaa    ■ ■aaaaBaaaaaaaaaaaaaaaaaaaaa* 

■  roaaaaBBaaaaaaaaaaaaaaaaB'  BaaaaBBaaaaBaaB4  BaBaaaaaaBBaaaBaaaaaaaiBaaBABBaaasaaaaaBBaaaaaa  •• aaaaaaaaaaBaB.  .  .aa    . .aa ..aBBaaaaaaaaBaaaaaaaaaaftaaBBBBBaBa 


IIMIIIItl4Htlli4*  L**4  44*4  M)**fH<*Wft4<Mt»M>tHHMMi«44*ii**fM4t  «Im  itMMtft  M  (ltTiT4  r-r^^-aKM^TTTTrr  fMtt'tJMii  H'tftI  flMl  li  falf  ItltTt 


■  - • aaaaaaaaaaBaaaBaBBaas        laaaaaaaaaaBaaaaa    ^aaaa aaaaaaaaaa aaaaaaaaaaaaaaasaaaa aaaaaaaaaa «s«BBaaaaaaB*«B.     • aa-^aaa-'^ai «>  BaaaaaaaaaaaaaaaBBaaaaaaaaa* 

■  BBaaaaaaaeSaaSaainaBaaakate.'aaaaaaaaaaaaaSaa.  ^aaBaBBaaaBaaaaaaaBaaaaaaaiaaaaaaaaBaaaBaaa— aaaaaaaaaaaaBaai-B*  «a    aa  ..  .aa    .aaaaaaaaaaBBBBaaaaaBaBaaaBaa 
•  aaaaaaaBaiaaaBaBaiaaaaBaBBaa*.  -aaaaaaaaaaaaaaaa.  "aaaaaaBaaaaiaaBlaaaiaBaiiBaBaaaaBaaaaaaB  •aaaaaaaaaaaaaa    ..-«a.     *mm'*»*%^  -    -aaaBaaaaaaaaBaaaaBBBB^caaa* 

■  ■aBaaaaaaBBBiaaaaaaaaaBBBaaaaak. -aaasaa aaaaaaaaaa . «a8aaaaaaaaBBB#aBaaaaBaaaaBaaaaaaaaaaaat..aBaaaaaaaaaaB  'B'  Baipaaa.. .aaaaaaaaa aaa •aaahaaaaa^aaa«aa«>B 

■  aaaaaaaBaiBBaaaaaaaaaaaBaaaaaaaaa^-aaaaaaaaaraaaaaa.  '«8aaaaaaaaaaaaaaaaaaaaaaaaaaaaaBaaaaa-«8BaaaBaaaBBapa-rfaa.     .>•. .aaaaBBaBaaaaaaaaBaaaaBaBava-Baaa- 


aataBaiiaBaBaBaancaaiaaaaaBBBaaBaaaaak    aaaaaaaaavaaBaah    vaaaMaaBaaaaiaBaaaaaasaasaaaaaaa  •aaaaaaaaaaaaafl  •a**  <-       aa  «    tai  la  <t ■aaaaaaaaaaaaaaaBaaaaaaBaa 

■  Baf'aBBiBliaaaBBesBaaSaBBaaaaaalvaaaaaaft  -oaaBaauaaaaaia..  ^•B&taaa«aB3aaBaaaBna8BaBaaaaa»--BaaaBaaBBaa«  ..«•  f  ««a.  aaaaaa^    :«BaaaBaBaaaaaaBBaBaBaaaaft»a. 

■  ■BraaBaaBBaaBBaaBaaBaaaaaaaBaaaaBaaaaaaaaa.  -"aamaaaaaaaiapak  -vanBaaaiBaaBaaaaaaaaBaaaasaa    ■  ■BBBaaaasaaaaaaaaa  taai  aaaaaBaaaaaaBaaaaaaaaaaaBaaaa-aaaa** 

■  •.    aaaaBaiBaaaaBBaBBaaaaaaaaaaBBBaaaaaaaaaaB.- . ^aBeBaaaiBiav.  •aaavaaaaaaaaaaaBaaBaBaaaaaaaaaBaaaaaaaaaa  *  .aaak-aaaaaaaaa  •• .BBaaaaaaaaaaaBaaaaasBBaBaaa 


■  aaaaaaaaaaaBBft  aaaaaaaaaaaaaBaaBaaaaaBBaaaaaaaaBaaaaaaflk  aaaaaaaBaaaa  'BaBaaaaaaBBaaaaaaaa  '■aaaaaaaaaaaaa  ■aaaaa  »aaaBBa>. BBaaBaaaBaaaaaaaaaBaaBaftBaa* 
•  aaaaiiBaSiBaaM)  aviaaBaafBiBBBSBBaBSaaBBaaalaaaaaaiaaaaBa  aaaaaaBiaaBk  vaBaaaBBaaaaaaaaaea  —  ■a8aaaaaaaBBa8aB..B  ..  t^a-- aaa  _  aaaaaaaa  Baaaaaaaaaaaaaaaaaa. 
«Baa-aBBBaBBBaiBBaaB«aaBaBBiaBBaaBaaiaBaaaaaBBBaaaBaaaaB«aB  -aaBBBaaBaaa.  aasaaaaaaaaaaBaaaa  •aaBBBBBBBaBBaa**  aaa       aaflavaaa  ..  Baaaaaaaaaaaaaaaaaaaaaaftaa^a 

■  rviaiaeaaaaair 7  ■BaaaBaBBaaaBalaafaaaBBaaaaBBaaaBBBBBaaaaaBk^BaaBBaaaaaB 'BBBBaaBaaBaaaaeBaaa ■aapaaaaaaaaaa.  •aaa-'aBB.daaa    .    BaaaaaBBaaaBaaaaB aaaaaaaaaa 


■  BaaaaaaaaaaaaaaaaaaaBaaaaaaasaaaBaBaaaBBaa       ^aaaa a bbbb aaa k  aaa aaaaaaaaaaa vwaaaaa aaaaaaaaaa  —  aaBaaaaa bbbbb  taaaa  ■.   aaa       -aa.  - iaaaaaaaaaaaaBaaaB aaaaaaaaa ■ 

■  I •  -■liaaaaaBBaaiBaaBiBaBaiBiaaaaaavaBaiiiaaBa "aiaBiaBaaBfa.  iBfEealaaaBBaaBaaaaaaaaaaaaBBa •aaaaaaaaaaaaa.    '  aaa'-vaa  faasaaaaaaiaaaaaaaaaBaaabBaaBBaBaa* 
■a.aBlBaaiBfaaBaaaBBBaaBBiaiafiaaBaaBaalBaaBBaBk^aBaaaaaaBBB.^aSaABaaaaaaaBaBaaaaaBBBaaaaBaaiBasaaaBsaaaaa-vaaa  '•  .aa-^aaBa..  jBaaaaaaaaBaBaBSBaaaaaa^aaaB 

■  BBilBBiaBBaaBaaBaBBaaBaBBaaBiflBaaaBBBaaiaBBBaBaB&^aaBBBBaalB  ■aaaaaaaa  Baaaaaaaa  a  MBaaaaaaa-.  aaaaaaaa  aaa  aa  ■    aaa'*  ^aaaaaaaaaa^aaaaaBaBaBaB  ■■■■•■■■••■■■■■ 

■  aaBBBBaBBaaaaaaBaaaaBBaaaBBBdSaaaaaSaaBBaiaaaBBBBB. -iSBBaaaaa^aawuBaaaaaaaaBBaaaaBaaaaaaC-  aaaaaaaaaaaaa Jaaaa  ^ laaBaaaar- -aaaaaaa^aBB aaa aBBBaaB •■*.«■ 


■a. J  iBaBaaaaBB«a8aBaaaaaaBaaBaaBaaaBBBaaiaB«Baa-.BB«BaBB' .aaiaaBaBaaBBBBBaBaBBaBaaaaaaaaaB  •■ BaBaaaaaaaaaa    .aaa'  > aaaaaaaaa.  -aaaaaaaBBBBBBaBaa aaaaaaaaaa 

■  aaajlaBBaBBaBaBaaaaaaaaiBaaaBaBBaaBaBaaaBaaa'f  aaliai''  «aBaiaaaaaeaBB8aaaBaaBBaaaaaBaaaaaa,..aBaBaaa8aaaaaBttBaa     .^aaaaaaaa    _  ■-laaaaaaaBaaaaaBBBaBaaaaaaia 
■aa8BtaaaSaiaiaBaaaaBBaaaa«BaiailiaaaafiaBaa^«aiBlBi'^a*awaaaaMaBa«aaaBaaBaaaafiaBaaaBBBBaBaaBaBaaaBaBaaB--aBBBBaaaaaaaaaaaaa8aBaaaBaBaaaaaaaaaBBaaaaB 

■  aBaaBaaBaBBaBaaaBBaaasBaaaaUBaBaaaBaaa*    ■aaaaaa'-  .aaaBaaBaaBaaaaaBaaaaaBBaaaaaaaBaaaaaaaaaaaaaBaaBaaaaaBa*  aaaaaaaaBaaaBa'ftBaaaaaaaaaaBaasaaBaBBBaBaaa 


•  r    .laaBaBaaaeaaeaBBaaaBBaat     jaaaaBaa."aaBB aaa aBBBaaaaaaaBaaaBaaBaaBaBaBaaaaaaaaa aaaaaaaaaa    -'aaaBBflBaaaBawaaa-.  m  aaaaaa  •  •(aaaaaBaBaaBaaBBaaftaaBaaaaaa 

■  ■    aaBaaaaataaaaBaaBaaaaaflaa.  •aaaaaasakaaaBaBeaBaaaBaBaaaBaBaaaflaBBaaaaaaaataaaaaaaaaBaaaa  •*  aaaBaaaiafafeB    *  aaa     ^    -  aaeBaaaaaaaBaBBaaaaaaaaaaBaaaaaaaai^ 

■  afeeaBBBaaBBBBiBBBaaBaaBBaaat  aB«aaaBaaak^8aBBaaaaaBBBaaBaaBBBaaaaBBa«BaaaaBaBaaa aaaaaaaaaa.. ''-aaBaaaaBftaaa         >a  •*  aaBiaaaa       v'^aaaaaaaaaBaaaaaa aaaaaaaaaa 


■BfBaaBaaaaaa 
aaaaaaaaaaaaa 


aaaaaBaaaaaBaaBsaaBaaaBBBr Jaaaaaaaaaar  «aaBaaaaaaaBBaaaaaaBaaaaaeaaaaaaaaaBaaaBa«BaBBBBBa--->BBaaaBBaaaaaaaaaaaaBaBaaaBa> 
aaaaaaaBBaaaaBaaaaaaBaaBB  .■BBBaaaaaa' «BBBaBBBBBa8BBaaBBaaaBaa«aaaaaBaBBBBflBaiaaaBaaaBeaBa«'  aBBaaaasaaaaaBHiaa.. aaaaaaaa  . 
aaa.aaBaBaaaaBaaaaBaaan'  afflaaBaap-.aaaBaaBaaBaaaaaaaaaaBBBaaaaBaaBaaaaaBaaaaaBaaaaaaaaBa.BaaaaaaBsaaaaaaaaaB '■^aaaaaaaa. 
a^BiBaaflaaaaaaBaaaaaaBirtaaaaaBa'  jBaaaaBBBBaaaaBBaeBaBBaaBBBBaaBaaBaBBBBaaBaBBBBaaaaaaaaa' - BaaBBaaaaaBsaaaaaa  m  aaaaaaaaa 
■•■.•aaaaaaaaaeaaaBBBBB'  aaaaaB- ^iaaaaaaaaaaBBaaaBaBaaasaaaaaaaaBiaaaaaBaaaBaaaBBaaBBaaaBarBaBBBBaaaalaaaaaaa  aaaaBBaa 
■  -^aaaBaBaaaaaaaaaaaa  ^aaaaa^  ~«aBBaaBaaBBBBaaBaaBaaaaaaaaBBBaaaBaaa a aaaaaaaaa a BBBaaaaaa  BBaBaaaaaaaaaaBaaaBCBaaaaBBB. 
■k.-aaBBaaaaaaBaaBiaaaasft- vaaBaak. -aaaaBaaBaBBBaaaBBBBBeaaaaaaaaBBBaaaBBaaaaaaaaBaaBaaaaa-  aaaaaaaa aaaaaaaaaa  ■aaaaBBB' 
•aaaaaaaaaaaaa aaaaaaaaaaaaa. *Ba88BB»  '•aaBaaaBaBaBBBaaBBaaBBBaaaaaaaaaaaaaaaaaaaaaaaaaaaBaBBaaaaaaaaaBBaaaBaaB*' ■aaaaaaa 


aaaBaaaaaaaaaaBBBBaaaaaaBaaaaBk.  ■•aaaaaaB^.  -■aBBBaaaBaBaaaaBaaaaBaBaaaaaaaaaaaaaaaBaaBaBa  -  aaBaaBBaaaaBBBaaaft  >aaaaaaaBk  « 
aaaBaBaaaaaaaaaaaaaaaaaBBaBaBaaaa. vaaaBBBBak  -BaBBBaBBaBBBaaBBaBaaaaaBBaaBaBBBaaBaaaaaaaa-raaaaBBaaBBBaaBaaaaraaakaaaajB 
aaBaaaaBaaaaaaBaaaaaBaaaaaaaaBaaBBk, vaBBBBaaafe. 'vaBaaBBaaBBaaaaBaaBaBaaaaaaBaaaBBaaaaaaat ..  .aaaBBBBaaaaaBaaaa .. Baaaaaaa . 
•at  aaaaaaaBaaaaaaaaaBaaaaaBaaaaaaafea. «BaBBiB«BaB.-aaBaaBaBBaBaeaBaa8aBBBaaaBaa8BaBBBBBBa**aBBaaaaaiaBBBaaBaa  Baaaaaaa* 
Bh  ~  laaBaaaaaBBaaeaBBBaaBBaaBaaBaaaaafBB.  '•aaaBaaaaaa*.  '■aBBBaaaBBaaBBaaBBaaaBaaaBaaaaaaeaaB  •■  aaaaaaaaaBaBaaaaaa-*aaaaaaaB  ' 
r«  .iaaBaaBaaaaaaaaBaaaaaaBaaaBaaBBaataaaB.  aaiaaaaaaa..  -^BaaaaaaaaBBBaaaaaaaaaBaaaaBaaaBa. ^Baaaaaaa BBaaBaaaaaa.  aaaaaaaa- 
aa.jaBaBaaBaaaBaBaaaaBaaaaaaaaaaaaaaaaaa*'  BBaaaaaa-  .—aBaaaaiBBBaaBaaaB •aaaaaaaaaaaaaa..  •aaaBBBaBaaaaaBaaaaaaaBaaBaa  • 
aaaaaaaaa BBBBaB«aaaaaaaaB8aaBaB8BBaa*'..aBBaaBB--  .•aaaaBaBaaaalaaaaaB^aaaaaiaaBaaaBBBai- -  aaaaaaaa BaaBaaaaaa'^aaaBaaaaa 
■■••■aaaaaaaaaBaaaaaaaaaaaaaaaaa^'-.BaBBaa*-^ ..■BBBBaaaaaaaaaBalaaBBaaaaaBa^aBaaaaaaaBaafta'aaaBaaaaBaaBaaaaaa  ••  aaaBBaa* . 
■aa«aaaaaeaaaaBaBaaBaaaBeaaa>-_y aaaaaa*'  .-aBBBBBBiBaBBBaaaBaaBaBaaaaiaaaBaaaaaaBaaaBaaBa... -aaaaaa BaaBflBaaaaa-aaBBaaaft. 
aaaBflaaBaaaaBaaaaaaaaaas*- ..aaaaaa*-    .aaaaaaaaBaBaaaaaaaaaaiBBBaaBaBaaaaaaaaaBaaBaaaaaBaa  aaa aaaaaaaaaaaaa    •aaaaaaBB 

■  •aaaaBaaBBBBaaaaaaa*'  .*Baaa»*-' ^-aaaaaaaaaaaaaaaaaaaaaaaaaaatiBBaaBaBaaaaaaBaaaaaaBaaaaa..-*- aaaaaaaaaaa  BBBBa-xaaaBaaaB  .i 
aaBaaaaaaaaBaaaa>'..aBaaB--  -.daiBaaaBaBaaaaaBaaBBaBBaBBBBBaiaBtBaaBaaBBaBaaaaaaiBBBBBaaaa    -      aaaaaaaBaaaaaaaa  *    Baaaaaaa 

•  "«. aaaBBBaa*- ..aaBa-*-.«aaaBsaaa*BaBaaBaaaaaBaBaaaaBBBBaBaaaaaaaasBaaBaeBaaaaaaBaBBBaaaak.  ..-aaaaBaaaaBaaflBaBaaaBaBaaaff  • 

•  ^  BaBSa«--..aBBa>-..«aaaBBaaaBaBaBBaaaB8BaBaaaBaBaaaaBB  aaaaaa  aaaaaaaa  BBBaBBaaaaaaaaaaaBaa'-  ~  -aaaaaaaaaBaaaaaa^*.  aiaaaBaa  • 
•-*•  .*aaB-       -^fttaaBaaaaaaaaaaaaaaaaaBBBBBaaaaaaaaa aaaaaa ■BBaawaBaaaaBaaaaBB^aaBBaaaBaa    -a    BaBaaBB«aBaaa8Bafi& •aaaaaaBa 


Baaaaaaaaas 

•aaaaaaaaaa 


172J 


[73] 


74 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


75 


i 


ii 


CHAPTER  II 

THE   NATURE    OF   THE    CONSTITUTIONAL   RESTRIC- 
TIONS ON  MUNICIPAL  DEBT 

The  origin  and  the  chief  causes  of  the  constitutional  restric- 
tions on  municipal  indebtedness  have  been  sketched  in  the  pre- 
ceding chapter.  In  this  chapter  a  brief  resume  of  the  restric- 
tions themselves  will  be  given,  together  with  the  principles  in- 
yolved  in  them  and  the  significant  changes  in  the  constitutions 
in  the  several  states. 

Prohibitions  against  municipalities  subsidizing  private  capital 
are  the  rule  in  the  United  States.     There  are  some  exceptions, 
however,  of  which  Wisconsin  and  Iowa  are  examples.     The  more 
modern  constitutions  such  as  those  of  the  western  states,   like 
Utah,  1895 ;  Wyoming,  1899 ;  Washington,  1889 ;  South  Dakota, 
1889 ;  North  Dakota,  1889 ;  Oklahoma,  1907,  and  the  constitutions 
of  New  Mexico  and  Arizona  all  prohibit  such  subsidies.     But  the 
restrictions  came  later  for  the  municipalities  than  for  the  states. 
The  constitution  of  California  restricted  the  state  in  this  regard 
in  1849,  but  the  municipalities,  not  until  1879.     Florida  imposed 
the  state  restrictions  in  1865 ;  the  municipal  in  1875 ;  Illinois,  the 
former,  in  1845 ;  the  latter,  in  1879 ;  Maryland,  the  former,  in 
1851,  the  latter,  in  1867,  etc.     Some  of  the  states  although  free 
to  lend  their  own  credit,  nevertheless,  limited  the  powers  of  the 
local  divisions  in  this  respect  during  the  70 's.     Connecticut  and 
New  Hampshire  are  cases  in  point.^ 

Other  debt  restrictions  can  in  the  main  be  summarized  as  fol- 
lows :  1.  The  amount  of  debt  is  generally  limited  to  a  definite 
percentage  of  the  assessed  value  of  the  property  within  the  dis- 
trict in  question.  2.  A  maximum  period  is  fixed  beyond  which  a 
debt  cannot  run.     3.  A  referendum  is  generally  required  for  all 

TTor  details  with  respect  to  all  the  states,  see  Appendices  1  and  11, 

[74] 


bonded  debt.  4.  A  direct  tax  is  required  to  be  levied  at  the  time 
the  bonded  debt  is  incurred,  and  at  each  succeeding  year  there- 
after to  pay  the  interest  as  it  accrues  and  the  principal  at  ma- 
turity. 5.  Money  borrowed  for  certain  purposes  is  not  counted 
in  computing  the  constitutional  debt.  6.  A  definite  extended 
limit  is  allowed  for  certain  classes  of  debt.  Let  us  review  these 
general  headings  in  the  order  named. 

The  ratio  of  debt  to  assessed  value  of  property  varies  consid- 
erably among  the  different  states,  and  frequently  within  the  same 
state  for  different  classes  of  municipal  corporations.  Indiana'^ 
imposed  a  two  per  cent,  limit  in  1881,  while  Virginia^  imposed 
an  eighteen  per  cent,  limit  in  1902  for  cities  and  towns.  Mon- 
tana* has  a  three  per  cent,  limit  for  cities  and  towns,  and  a  five 
per  cent,  limit  for  counties;  while  Utah^  has  a  four  per  cent, 
limit  for  cities  and  towns,  and  a  two  per  cent,  limit  for  counties. 
There  is  no  general  uniformity  among  the  constitutions  of  the 
several  states,  but  a  percentage  between  five  and  ten  is  most  com- 
mon and  may  be  considered  to  be  the  norm.  The  ratio  most  gen- 
erally applies  to  all  property  assessed  for  state  and  county  pur- 
poses, and  the  value  used  is,  in  most  instances,  that  of  the  preced- 
ing year.  In  a  few  cases,  however,  the  assessment  is  based  on 
real  property  alone.  New  York  and  Virginia  are  examples  of 
this  latter  practice.  In  California^  and  Idaho,^  the  debt  is  not  to 
exceed  in  any  one  year  the  income  and  revenue  provided  for  that 
year,  without  the  consent  of  two-thirds  of  the  qualified  electors; 
while  in  Utah«  and  Wyoming,^  it  is  not  to  exceed  the  taxes  for  the 
current  year  without  a  popular  vote.  In  general,  it  may  be 
said,  the  debt  allowed  is  based  upon  the  assessment  of  property. 

A  maximum  period  is  usually  specified  for  which  debt  may 
run,  and  this  varies  for  bonded  debt  from  twenty  to  seventy-five 
years.  California  fixed  the  period  in  1879  at  twenty  years ;  this 
was  extended  to  forty  years  by  constitutional  amendment  in  1900, 


*  Amendment  to  Constitution  of  ISSl.  art.  xii,  sec.  i. 
» Constitution,  1902.   sec.    127. 

*  Constitution  1S89,  art.  xiii,  sections  5  and  6. 
^Constitution,  1895,  art.   xlv,  sections  3  and  4. 
'Constitution,  1879.   art.    xi,   sec.   IS. 

'  Constitution,  1S89,  art.  viii,  sec.  3. 

*  Constitution,  1895,  art.  xiv,  sec.  3. 

*  Constitution,  1S89,  art.  xvi,  sec.  4. 

[75] 


I 


7« 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


and  again  extended,  for  a  few  cities,  to  75  years  in  1906.^^ 
Oklahoma^^  fixes  the  period  at  twenty-five  years,  Pennsylvania  " 
at  thirty  years.  West  Virginia,^^  at  thirty-four  years,  Kek- 
tueky,^^  at  forty  years,  and  New  Mexico,^^  at  fifty  years.  South 
Carolina  and  South  Dakota  require  that  debt  shall  be  paid 

when  due''  without  specifying  the  period.  These  provisions 
apply  to  all  bonded  debt  irrespective  of  the  purposes  of  the  loans 
or  the  uses  to  which  the  proceeds  are  put. 

The  almost  universal  rule  is  to  require  a  referendum  vote  for 
bans  involving  long  time  indebtedness.  The  vote  necessary  to 
legalize  a  loan  ranges  from  a  majority  to  two-thirds  of  the  quali- 
fied electors,  and  in  at  least  four  states— Colorado, ^«  Montana  " 
New  Mexico,^«  and  Utah--is  based  upon  a  property  qualifica- 
tion. 

The  levy  of  a  direct  annual  tax  at  the  time  the  loans  are  made 
and  yearly  thereafter  to  pay  the  interest  as  it  accrues  and  the 
principal  at  maturity  is  mandatory  in  a  great  many  of  the  con- 
stitutional restrictions.  These  provisions  apply  to  all  public  cor- 
porations,  and  to  all  forms  of  debt  outside  of  those  loans  which 
are  of  a  temporary  character,  or  those  paid  serially. 

Probably  the  most  significant  thing  in  the  constitutional  limita- 
tions and  the  one  that  shows  a  distinctly  modern  movement,  is  the 
omission  of  certain  types  of  loans  from  the  debt  limit,  or  the  ex- 
tension of  the  constitutional  limit  for  the  debt  incurred  in  the 
acquisition  of  public  utilities.  Some  of  the  states  adhere  to  the 
absolutely  nonelastic  restrictions.  Wisconsin  and  Illinois  are  ex- 
amples. New  York,  Virginia,  and  Oklahoma  are  examples  of 
those  which  have  adopted  a  more  elastic  base.  Let  us  note  in 
particular  some  of  the  more  recent  changes. 

Alabama,  in  her  constitution  of  1901,  allows  3  per  cent,  of  the 

^'Amendment,  1906,  to  the  Constitution  of  1879,  art.  xi,  sec.  18. 

"  Constitution,  1907,  art.  x,  sec.  26. 

"  Constitution,  1S73,  art.  ix.   sec.   10. 

^'  Constitution,  1872,  art.  vlii,  sec.  8. 

^*  Constitution,  1890,   sec.  159. 

"  Constitution,  1911,  art,  ix.  sec.  12. 

**  Constitution,  1876,  art.  xi,  sections  6  and  7. 

^''Constitution,  1^9,  art.  xiii,  sec.  6. 

"  Constitution,  1911,  art.  ix,  sec.  10. 

"  Constitution,  1893,  art.  xiv,  sec.  3.  - 

[76] 


SECPwIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


77 


assessed  value  of  property  over  and  above  the  ordinary  limit  for 
''construction  or  purchase  of  waterworks,  gas  or  electric  lighting 
plants,  or  sewerage,  or  for  the  improvements    of    streets."^** 
Neither  the  original  five  per  cent,  nor  the  three  per  cent,  addi- 
tional, is  in  any  way  effected  by  any  **  temporary  loan  to  be  paid 
within  one  year,  made  in  the  anticipation  of  the   collection  of 
taxes,  not  exceeding  one-fourth  of  the  annual  revenues"-^  for  any 
city  or  town.    All  cities  having  a  population  of  6,000  or  over  are 
allowed  to  become  indebted  7  per  cent,  of  their  assessed  value ; 
and  debt  for  the  following  purposes  is  not  to  be  counted  in  com- 
puting this  percentage :  ' '  temporary  loans  to  be  paid  within  one 
year,     .     .     .     and  not  exceeding  one-fourth  of  the  general 
revenues,  bonds  or  other  obligations  already  issued  or  which  may 
be  hereafter  issued  for  the  purpose  of  acquiring,  providing,  or 
constructing  school  houses,  waterworks, ' '^'^  etc.    Special  assess- 
ment loans  are  not  counted  in  making  up  this  total,  and  full  pow- 
ers of  funding  and  refunding  are  given  in  addition.     Arizona, 
in  her  new  constitution,  allows  cities  and  towns  five  per  cent,  ad- 
ditional debt  over  the  regular  amount  for  supplying  water,  sew- 
erage, or  lighting  plants  to  be  owned  by  the  city  or  town  in  ques- 
tion.23     Montana  allows  additional  debt  over  the  ordinary  limit 
for  providing  water,  but  does  not  name  the  amount.     In  order  to 
take  advantage  of  the  provision,  however,  a  city  must  own  the 
utilities,  devote  the  surplus  revenues  to  the  payment  of  debt, 
and     receive     sanction  '  of     the     taxpayers.^*     Other     states 
adopting  essentially  these  conditions  are  New  Mexico,-'^  New 
York,2«   North  Dakota,^^   Oklahoma,^^  South  Dakota,-^  Utah,^'* 
Virginia,3i  Washington,^^  and  Wyoming.^^*    New   York,    Okla- 


mimi 


^^Constitution,  1901,  sec.  225. 

« Ihid. 

« Ibid. 

a  Constitution,  1911,   art.  ix,  sec.  8. 

^Constitution,  1889,  art.  xiii,   sec.   6. 

»  Constitution,  1911,  art.  ix,  sec.  13. 

^Constitution,  189^,  as  amended,  art.  viii,  sec.  10. 

"Constitution,   1889,   sec.    183. 

^  Constitution,  1907,  art.  x,  sec.  27. 

»  Constitution,  1889,  art.  xiii,  sec.  4. 

*'*  Constitution,  1895,  art.   xiv,  sec.  4. 

'*  Constitution,  1902,  sec  127. 

»  Constitution,  1889,  art.  viii,  sec.  6. 

'^  Constitution,  1889,  art.  xvi,  sec  5. 

[77] 


7.1 


1 


78 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


homa,  and  Virginia  deserve  particular  attention. 

The  Oklahoma  constitution  reads  as  follows:     **Any  incorpo- 
rated city  or  town  in  this  state  may,  by  a  majority  of  the  qualified 
tax  paying  voters  of  such  city  or  town,  voting  at  an  election  to  be 
held  for  that  purpose,  be  allowed  to  become  indebted  in  a  larger 
amount  than  that  specified  in  section  26  for  the  purpose  of  pur- 
chasing or  constructing  public  utilities,^''  or  for  repairing  the 
same,  to  be  owned  exclusively  by  such  city  or  town     .     .      . ''»» 
In  addition  a  direct  tax  is  required  sufficient  to  pay  the  interest 
as  it  becomes  due  and  the  principal  within  twenty-five  years. 
The  question  in  the  carrying  out  of  this  provision  turns  upon 
what  are  ''public  utilities"  within  the  meaning  of  the  constitu- 
tion.    This  expression  has  come  to  have  a  well  defined  popular 
meaning,  but  this  will  not  suffice  in  cases  concerning  the  legal 
application  of  this   constitutional  clause.     The  Oklahoma  Su- 
preme Court  has  already  interpreted  these  words  in  several  cases. 
In  State  v.  Miller?^  sewers  are  held  to  be  public  utilities  within 
the  meaning  of  the  constitution.    The  same  court  in  State  v, 
Barnes,''  quotes  approvingly  Valley  City  Salt  Co.  v.  Brown,^' 
where  public  utility  is  made  synonymous  with  public  use,  and 
maintains  that  public  use  involves  the  idea  of  public  benefit  or 
advantage  as  well  as  use  by  the  public.     This  line  of  reasoning 
led  the  court  to  hold  that  a  town  hall,  since  it  is  constructed  by 
the  city,  used  by  it  exclusively  and  for  public  purposes,  is  a  pub- 
he  utility  within  the  meaning  of  the  term  in  the  constitution. 
The  court  put  the  case  on  the  basis  of  necessity  and  used   the 
terms  ''public  uses"  and  "public  utilities"  as  identical.^«    In 
Barnes  v,  HiW'  the  court  reviewed  the  two  above  cases  and  re- 
stated Its  position  that  "public  utility"  meant  "public  use,"  and 
held  that  a  park  owned  exclusively  by  the  city  in  question  was  a 
public  utility.    These  decisions  have  so  distorted  the  expression 
"public  utility,"  and  so  misinterpreted  the  logical  intent  of  the 

**  Italics  mine. 

*  Constitution,  1907,  art.  x,  sec.  27. 
"  96  Pac.  Rep.  747,  (1908). 

"57  Pac.  Rep.  997  (1908). 

*  7  Went  Virginia,  191. 

.o™i'i,^;^rnrt"errdasr'''"*"  *''••  "*"  "^-^  *°  "^ '-'"" »-  "<> 

*^199  Pacific,  927    (1909). 

[78] 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


79 


constitutional  provision,  that  any  purpose  for  which  taxation 
would  be  valid  can  be  supported  by  this  elastic  clause.  In 
reality,  therefore,  no  restriction  at  all  is  imposed  except  that  of 
the  wishes  of  the  majority  of  the  taxpayers. 

A  more  rational  but  in  some  respects  an  indefensible  change 
has  been  made  in  the  constitution  of  New  York  in  order  to  suit 
the  needs  of  her  growing  metropolis."  New  York  imposes  no 
constitutional  restriction  upon  the  indebtedness  of  towns  and  vil- 
lages. The  percentage  limitation  for  cities  and  counties  is  ten 
per  cent.  This  limit,  under  the  amendment  of  1884,  was  not  to 
apply  to  certificates  of  indebtedness  or  to  revenue  bonds  issued  in 
anticipation  of  the  collection  of  taxes  for  amounts  actually  con- 
tained or  to  be  contained  in  the  taxes  for  the  year  when  they  were 
made  payable.  Nor  was  this  section  to  be  construed  to  prevent 
the  issue  of  bonds  for  the  supply  of  water,  but  the  terms  of  the 
latter  bonds  were  not  to  exceed  twenty  years  and  a  sinking  fund 
for  their  interest  and  principal  was  to  be  accumulated.*^ 
Later,  by  amendments,  certificates  of  indebtedness  not  retired 
in  ^Ye  years,  and  bonds  issued  for  water  purposes,  except  those 
of  New  York  city,  after  the  first  day  of  January,  1904,"  and 
any  city  of  the  second  class  after  January  first,  1908,**  and 
for  any  city  of  the  third  class  after  January  first,  1910,  were 
to  be  counted  as  debt. 

By  1907,  New  York  city  had  almost  reached  its  debt  limit,  and 
enormous  expenditure  was  necessary.  In  order  to  provide  for 
the  expanding  needs  of  the  city,  it  was  necessary  to  change  the 
debt  limit.  This  was  accomplished  in  1909,  by  an  amendment 
following  a  detailed  report***  upon  the  debt  of  the  city  made  in 
1908.  This  report  advised  "that  debts  heretofore  or  hereafter 
incurred  by  said  city  (New  York)  for  the  acquisition  of  property 
or  for  the  construction  of  railroads,  docks,  or  other  improvements 
which  shall  be  owned  by  the  said  city,  shall  not  be  so  included  if 


*^  For  further  discussion  of  this  change,  see  pp.  81-82. 

**  Constitution,  1894,  art.  viii,   sec.   10. 

**  Amendment,   1905, 

**  Amendment,  1907. 

*^  Report  of  Advisory  Commission  on  Taxation  and  Finances,  "The  City  Debt 
in  its  Relation  to  the  Constitutional  Limit  of  Indebtedness,  Containing  a  Pro- 
posed Amendment  to  Section  10  of  Article  VIII  of  the  State  Constitution." 
1908.     Lawson  Purdy,   Secretary. 

[79] 


80 


BULLETIN  OF  TflE  UNIVERSITY  OP  WISCONSIN 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


81 


fi 


it  shall  appear  by  the  ascertainment  and  determination  herein- 
after provided,  that  the  said  city  is  receiving  current  net  income 
from  such  property  or  improvements  in  excess  of  the  interest  pay- 
able by  said  city  upon  the  total  debt  incurred  for  the  acquisition 
of  such  property  or  the  making  of  such  improvement.  "*«     The 
amendment  of  1909  followed  very  closely  the  recommendations 
above,  but  defined  more  exactly  the  circumstances  under  which 
the  deductions  should  be  made,  to-wit :  ' '  f or  a  public  improve- 
ment owned  or  to  be  owned  by  the  city  which  yields  to  the  city 
current  net  revenue,  after  making  any  necessary  allowances  for 
repairs  and  maintenance  for  which  the  city  is  liable,  in  excess  of 
the  interest  on  said  debt  and  of  the  annual  installments  necessary 
for  its  amortization,  may  be  excluded  in  ascertaining  the  power 
of  said  city  to  become  otherwise  indebted,  provided,  that  a  sink- 
ing fund  for  its  amortization  shall  have   been   established  and 
maintained  and  that  the  indebtedness  shall  not  be  so  excluded 
during  any  period  of  time  when  the  revenue  aforesaid  shall  not 
be  sufficient  to  equal  the  said  interest  and  amortization  install- 
ments, and  except  further  that  any  indebtedness  heretofore  in- 
curred by  the  city  of  New  York  for  any  rapid  transit  or  dock  in- 
vestments may  be  so  excluded  proportionally  to  the   extent  to 
which  the  current  net  revenue  received  by  said  city  therefrom 
shall  meet  the  interest  and  amortization  installments  therefor, 
provided  that  any  increase  in  the  debt  incurring  power  of  the 
city  of  New  York  which  shall  result  from  the  exclusion  of  debts 
heretofore  incurred  shall  be  available  only  for  the  acquisition  or 
construction  of  properties  to  be  used  for  rapid  transit  or  dock 
purposes/ '^^     The  legislature  was  given  power  to  prescribe  the 
methods  and  terms  under  which  debt  for  the  above  purposes 
could  be  excluded,  and  it  has  since  put  the  power  of  determina- 
tion into  the  hands  of  the  Appellate  division  of  the   Supreme 
Court,  upon  the  application  of  the  Board  of  Estimate  and  Appor- 
tionment, and  after  a  hearing  has  been  accorded  to  the  parties 
interested.*® 


*»  Ibid.,  p.  97. 

*' Constitution,  189^,  as  amended  1909,  art.  viii    sec    10 

l^w'^V.^Tl  1252''"'     '''"''  ^''""^'•^'^^  ^-^^  ^-««^«'  ^^ronicle.  May  7, 

[80] 


This  amendment  marks  a  distinct  advance  over  the  provisions 
of  the  constitutions  noted  above,  which  omit  loans  for  specified 
purposes  from  the  debt  limit  without  at  the  same  time  providing 
that  they  shall  bear  net  revenue.  This  provision  together  with  a 
similar  provision  in  the  constitution  of  Virginia,  indeed,  marks 
a  decided  advance  over  all  the  constitutions  of  an  early  period 
and  over  most  of  those  which  have  been  framed  in  recent  years. 

In  most  respects  the  provisions  on  local  debt  in  the  constitu- 
tion of  Virginia  are  essentially  similar  to  those  in  the  New  York 
constitution  quoted  above.  The  former  provide  that  the  exemp- 
tion from  the  debt  limit  shall  apply  only  so  long  as  the  municipal 
plants  for  supplying  water,  etc.  succeed  in  producing  sufficient 
revenue  to  pay  the  cost  of  operation  and  administration,  *  *  includ- 
ing intere^  on  bonds  issued  therefore  and  the  cost  of  insurance 
against  loss  by  injury  to  persons  or  property  and  an  annual 
amount  to  be  covered  into  a  sinking  fund  sufficient  to  pay,  at  or 
before  maturity,  all  bonds  issued  on  account  of  said  undertak- 
ing,'' and  all  ''bonds  outstanding  shall  be  included  in  deter- 
mining the  limitation  of  the  power  to  incur  indebtedness  unless 
the  principal  and  interest  thereof  be  made  payable  exclusively 
from  the  receipts  of  the  undertaking."*®  This  provision  seems 
to  be  all  that  could  be  asked  for  in  guaranteeing  that  the  amount 
of  debt  contracted  by  local  divisions  shall  not  be  unduly  burden- 
some, and  at  the  same  time  allowing  expansion  of  the  debt  limit 
for  purposes  which  are  in  truth  revenue  bearing.  So  far,  so 
good.  But  in  these  provisions  as  well  as  those  in  New  York,  the 
mistake  is  made  of  giving  the  creditor  absolute  protection  against 
any  contingency  by  making  the  loan,  in  case  the  properties  are 
not  revenue  bearing,  a  burden  upon  the  tax  paying  public,  and  at 
the  same  time  extending  to  the  consumer  and  not  to  the  tax  payer 
the  benefit  which  this  guarantee  brings.  The  debt  contracted  for 
a  particular  undertaking  is  paid  for  by  the  consumer  only  so  long 
as  the  venture  in  question  is  successful.  When  it  fails,  not  the 
consumer  but  the  taxpayer  bears  the  burden.*®  Is  it  possible  that 
this  arrangement  serves  as  a  partial  explanation  of  the  unwilling- 


^  Constitution    of  Tirginia,  1902,    sec.    127b. 

'*Vide,  chapter  306,  Acts  of  ISoth  Legislature  of  New  Jersey   (1911)   where 
this  is  allowed  respecting  debt  for  sewer  purposes. 

[81] 


82 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


83 


ness  of  cities  to  undertake  municipal  enterprise!  If  the  debt 
contracted  for  revenue  bearing  properties  can  legitimately  be 
considered  as  outside  the  debt  limit,  then  the  security  offered  for 
the  loan  necessary  to  acquire  them  should  be  their  earning  power 
or  the  properties  themselves  and  nothing  else.  One  class — the 
taxpayer — should  not  be  required  to  pay  for  the  benefits  which 
failure  to  earn  net  revenue  resulting  from  excessively  low  charges 
or  from  lax  administration  brings  to  another  class — ^the  consumer. 
The  requirement  that  debt  shall  be  considered  as  outside  the  legal 
limit  when  the  properties  which  it  represents  are  revenue  bear- 
ing is  not  equivalent  to  the  requirement  that  loans  for  such  pur- 
poses shaU  be  made  upon  the  security  of  the  properties  them- 
selves or  their  earnings,  and  omitting  the  additional  provision 
that  in  case  of  failure  to  earn  net  revenue  the  creditor  may  rely 
for  the  satisfaction  of  his  claim  upon  the  general  credit  of  the 
taxing  body.  A  readjustment  of  the  relation  of  creditor  and 
debtor,  of  consumer  and  taxpayer  is  necessary  in  those  cases 
where  such  liberties  in  contracting  debt  are  allowed.  A  sugges- 
tion of  the  needed  change  is  made  in  Chapter  4  following. 

Ordinarily  the  power  to  borrow  extends  to  all  grades  of  mu- 
nicipal corporations,  without  classification  as  to  function,  size  or 
needs  for  borrowed  funds.  Wisconsin  is  an  example  of  a  state 
where  this  is  true.  Five  per  cent,  is  allowed  *  *  any  county,  city, 
town,  village,  school  district  or  other  municipal  corporation." 
The  same  is  true  in  Illinois,  and  as  a  result,  we  have  in  the  city 
of  Chicago,  occupying  almost  identically  the  same  territory,  the 
city  Corporation,  Cook  County,  School  District,  Park  Commis- 
sion  and  Sanitary  districts  all  with  independent  borrowing  power 
— in  each  case  the  debt  allowed  not  to  exceed  five  per  cent,  of  the 
assessed  value  of  the  property  within  the  geographical  district  in 
question.'*^  There  are  two  state  constitutions  which  forbid  undue 
accumulation  of  debt  by  over-lapping  political  jurisdictions. 
Nebraska  prohibits*"  any  county  with  all  its  subdivisions  from 
making  a  grant  in  aid  of  any  railroad  company  in  excess  of  ten 
per  cent,  of  its  assessed  value,  unless  it  receives  a  two-thirds  popu- 
lar vote,  in  which  case  it  may  add  an  additional  five  per  cent. 


•*  Btati8tic8  of  Cities  with  Population  over  S0,000,  1908,  pp.  22,  26. 
••  Constitution,  1S75,  art.  xil,  sec.  2. 

[82] 


South  Carolina  prohibits  any  debt  in  excess  of  fifteen  per  cent,  of 
the  assessed  value  of  property  for  all  over-lapping  municipal  cor- 
porations.*^^ These  are  the  only  two  states  where  the  legislatures 
are  prevented  from  indefinitely  increasing  debt  by  the  creation  of 
independent  corporations. 

One  other  characteristic  of  a  limited  number  of  constitutions 
deserves  mention.  It  is  the  requirement  that  the  validity  of  mu- 
nicipal bonds  be  certified  by  some  central  board  or  officer  of  the 
government.  North  Dakota's^*  constitution  requires  local  bonds 
to  be  indorsed  by  a  certificate,  signed  by  the  county  auditor  or 
other  officer  authorized  by  law,  stating  that  the  bonds  are  issued 
pursuant  to  law  and  are  within  the  legal  debt  limit.  Oklahoma's 
constitution^^  carries  a  like  provision  as  do  a  few  of  the  other 
states.    We  shall  speak  of  these  in  some  detail  a  little  farther  on. 

These,  in  the  main,  are  the  general  principles  involved  in  the 
constitutional  restriction  on  municipal  debt.  The  prohibitions 
against  lending  credit,  etc.,  first  written  into  constitutions  be- 
cause of  unwarranted  and  excessive  aid  to  private  capital,  were 
followed  by  others  which  limited  the  total  debt  allowed  to  a  cer- 
tain percentage  of  the  assessed  value  of  property,  and  these  are 
being  in  turn  tempered  and  conditioned  by  a  more  or  less  arbi- 
trary elimination  of  certain  forms  of  debt  from  the  constitutional 
limit.  The  changes  being  made  are  in  many  respects  beyond 
criticism,  but  fundamentally  the  limitations  themselves  are  open 
to  serious  objection,  and  to  the  consideration  of  these  we  shall 
now  turn  our  attention. 


•^  Constitution,  1895,  art.  x,  sec.  5. 

"  Constitution,  1889,  sec.  187. 

"  Constitution,  1907,  art.  x,  sec,  29. 


[83] 


84 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


CHAPTER  3 

A  CRITICISIM  OF  THE   POLICY  OF  RESTRICTING  MU- 
NICIPAL DEBT  BY  THE  PRESENT  CONSTITU- 
TIONAL METHOD 

The  term  municipality  or  municipal  corporation  has  been  used 
in  the  preceding  chapters  to  describe  all  of  those  minor  political 
units  which  owe  their  existence  to  legislative  enactment,  and  re- 
ceive their  powers  direct  from  the  legislatures.  But  this  use 
lacks  precision  in  constitutional  or  legislative  provisions  which 
outline  financial  policy  and  powers,  because  it  covers  too  much 
and  essentially  different  units.  A  school  district,  a  county,  a 
town  or  city,  although  similar  as  administrative  areas,  and  al- 
though created  primarily  for  governmental  purposes,  are  so  dif * 
ferent  in  their  functions  that  they  should  be  given  different  fi- 
nancial powers  and  privileges.  Any  criticism  of  the  present  con- 
stitutional control  of  debt  and  the  rationale  of  the  restrictions 
themselves  must  be  prefaced  by  a  brief  analysis  of  the  functions 
of  municipalities. 

Municipal  corporations  are  in  essence  of  a  two-fold  character.* 
From  one  point  of  view  they  are  administrative  units,  in  so  far 
as  they  are  the  agents  of  the  state ;  from  another  point  of  view 
they  are  business  units,  in  so  far  as  they  are  created  to  provide 
local  necessities  and  conveniences.  The  former  characteristic  is 
illustrated  by  the  county  units  which  are  created  primarily  to  aid 
the  state  in  administering  justice,  in  promoting  education,  etc. 
They  have  a  direct  and  almost  exclusive  reference  to  the  general 
policy  of  the  state  and  serve  as  agents  through  which  it  may  be 


*  McQuillin,  Eugene,  A  Treatise  on  the  Law  of  Municipal  Corporations. 
(Chicago)  1911,  vol.  1,  pp.  203-204;  Pond,  O.  L.,  Mtinicipal  Control  of  Public 
Utilities,  p.  21 ;  Deming,  Horace,  The  Government  of  American  Cities,  1909, 
pp.  126-128;  Bryce,  Jas.,  American  Commontcealth  (New  and  Revised  Edition, 
1911)  Vol.  1,  pp.  634-635;  American  and  English  Encyclopedia  of  Law,  (2nd 
edition)   p.  1131. 

[84] 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


85 


carried  out.     The  latter  characteristic   is   illustrated   in   street 
paving,  drain  and  sewer  construction,  in  sewage  disposal  and 
the  general  business  functions  of  cities.    Thus  while  a  city  is  an 
arm  of  the  state  in  the  administration  of  law,  for  instance,  it  is, 
at  the  same  time,  and  is  becoming  more  and  more  so,  a  business 
unit  through  which  its  stockholders^ — the  public — are  served. 
From  this  point  of  view,  a  city  should  be  regarded  as  subject  to 
many  of  the  same  laws  of  finance  as  a  private  corporation.    The 
same  standards  of  service  must  be  furnished,  and  ceteris  paribus 
at  the  same  cost  to  the  consumers.^     Capital  must  be  supplied 
and  replaced  when  worn  out,  extensions  and  improvement  made, 
depreciation  provided  for  and  properties  kept  up  as  producing 
units.    What  cities  need  from  the  state  is  power  to  carry  on  local 
government ;  what  they  should  do  is  in  large  measure  to  be  deter- 
mined by  those  alone  concerned  acting  as  a  corporate  unit.     The 
responsibilities  of  effecting  a  desired  end  should  rest  with  the  ap- 
propriate officials,  and  the  execution  of  the  policies  determined 
upon  be  according  to  approved  business  and  economic  principles. 
The  accepted  functions  of  political  units  constantly  change,  and 
the  regulations  governing  their  activity  must  be  formulated  in 
the  light  of  this  fact.    A  hard  and  fast,  an  a  priori  philosophy  of 
the  relations  of  the  state  to  the  minor  units,  as  well  as  the  rela- 
tions of  the  latter  to  commercial  and  industrial  enterprises,   is 
bound  to  be  archaic  almost  as  soon  as  it  is  formulated.     State  con- 
trol over  local  finance  is  necessary — ^the  patrimony  of  both  are  in 
a  large  measure  identical, — ^but  to  be  effective  it  must  be  dynamic 
and  elastic,  and  these  qualities  our  present  constitutional  restric- 
tions do  not  possess.*    This  subject  is  treated  in  Chapter  4  fol- 
lowing.   What  we  are  now  primarily  concerned  with  is  not  con- 
stitutional restraint  versus  some  other  type  of  control,  but  the 
principles  involved  in  these  restrictions. 


*  Bryce  calls  them  "stockholders."  American  Commonwealth,  (New  and  Re- 
vised Edition)  1911,  vol.  1,  pp.  634-635. 

*  The  cost  principle  which  determines  the  charge  made  depends,  among  other 
things,  upon  the  desirability  of  general  consumption,  the  cost  of  the  article  or 
service  in  question  in  comparison  with  the  cost  of  some  other  commodity  or  ser- 
vice which  the  city  might  provide,  etc. 

*  Ashley,  Percy,  "The  Financial  Control  of  Local  Authorities."  The  Eco- 
nomic  Journal  (London),  vol.  12,  p.  187. 

[85] 


II 


% 


M  HI' 


w 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


87 


lif 


liiil 


11 


There  are  no  valid  objections  to  the  constitutional  prohibitions, 
now  almost  universal  among  the  states,  against  municipalities 
lending  their  credit  to  and  subscribing  to  the  stock  of  private  cor- 
porations. The  era  of  timidity  and  scarcity  of  private  capital  is 
past,  and  subsides  in  the  form  of  public  aid  are  no  longer  neces- 
sary to  attract  and  promote  legitimate  private  enterprise.  The 
market  for  private  securities,  through  the  perfection  of  ex- 
changes, is  now  so  vast  and  the  supply  of  capital  so  responsive 
to  the  demand  that  requisite  funds  are  readily  collected  for  enter- 
prises of  distinct  benefit  to  industrial  growth  or  supremacy. 
Such  restrictions  being  essentially  a  matter  of  policy,  and  requir- 
ing no  technical  nor  extended  definition  nor  involving  questions 
of  technique  and  administrative  excellence  may  conveniently  be 
placed  in  the  fundamental  law  as  settled  for  an  indefinite  time. 
Conditions  calling  for  a  reversal  of  public  opinion  will  not  fre- 
quently arise,  and  if  they  do,  the  change  demanded  may  likewise 
be  incorporated  in  the  constitutions.  The  other  restrictions  re- 
quire extended  and  detailed  treatment. 

Municipal  credit  ultimately  rests  upon  the  taxing  power.  Re- 
siources  of  municipalities,  except  for  the  few  properties  which  are 
revenue  bearing,  lie  in  the  value  of  private  property  subject  to 
taxation.  Taxes  become  a  first  lien  upon  this  value,  and  it  is  to 
this  that  the  creditor  looks  for  the  satisfaction  of  his  claims.  But 
values  for  tax  purposes,  in  the  United  States,  are  assessed 
values — a  certain  per  cent,  of  the  market  value — and,  to  guard 
against  undue  taxation,  constitution  makers  have  expressed 
the  amount  of  debt  permissible  to  a  municipality  as  a  cer- 
tain per  cent,  of  this  assessed  value.  The  determining  considera- 
tion in  fixing  the  debt  limit  has  been  the  amount  of  debt'  and  not 
the  need  or  desirability  of  a  policy  of  deficit  financiering.  But 
these  two  aspects  of  this  question,  although  confused  even  today 
in  our  latest  constitutions,  are  nevertheless  quite  dissimilar  and 
should  be  discussed  separately. 

The  general  property  tax  is  distinctly  American,  and  was  com- 
mon among  the  states  at  an  early  date.    This  tax,  although  pos- 


1 


III  J 


'Vide,  "Doon  Townsbip  v.  Cummins,"  1^2  United  States  S66,  S72;  "Herman  v. 
City  of  Oconto,"  86  N.  Western.  Rep.  631,  687  (Wisconsin)  1901;  Foote,  A.  R., 
Constitutional  Municipal  Government,  p,  83. 

[86] 


sessed  of  some  points  of  value  when  properties  are  simple  and 
tangible,  is  now  discredited  and  generally  considered  a  failure. 
Its  weaknesses  as  a  system  of  taxation  it  is  unnecessary  to  con- 
sider, but  the  difficulties  involved  in  its  assessments  are  pertinent 
to  our  inquiry.  These,  when  approached  from  the  point  of  view 
of  public  borrowing,  present  new  and  interesting  problems. 

Constitutional  restrictions  based  upon  the   assessed  value  of 
property  are  imposed  to  prevent  public  credit  being  abused.     But 
if  property  is  under-assessed,  then  the  use  of  credit  is  prevented 
to  the  degree  of  the  under-assessment  even  when  a  policy  of  deficit 
financiering  is  justified,  and  also  when  the  debt  limit  in  reality 
has  not  been  reached  when  it  is  measured  in  terms  of  actual  prop- 
erty value.    Limitations  on  the  use  of  debt  must  serve  among 
other  purposes,  (1)  to  prevent  undue  or  extortionate  taxation, 
and  (2)  to  express  the  relative  proportions  in  which  tax  burdens 
should  be  divided  between  the  present  and  the  future  tax  payers. 
The  total  burden  which  taxpayers  must  bear  will  approximately 
be  equal  from  one  tax  period  to  another,  but  the  proportions  in 
which  it  is  divided  as  between  current  revenues  and  debt  obliga- 
tions, must  of  necessity  vary  with  each  change  of  policy  adopted 
and  each  new  project  undertaken.     To  make  the  borrowing  power 
a  certain  percentage  of  the  assessed  value  of  property  answers 
only  half  of  the  problem,  and  this  part  in  an  unscientific  manner. 
Borrowing  is*  a  necessary  financial  device  for  public  corporations 
to  employ.     It  is  liable  to  abuse,  however,  and  needs  to  be  regu- 
lated, but  regulation  must  not  be  made  dependent  upon  the  will- 
ingness or  ability  of  local  assessors  to  correctly  or  uniformly 

evaluate  property. 

The  difficulties  involved  in  such  a  scheme  of  regulation,  in  so 
far  as  the  assessment  of  property— the  measure  of  permissible 
debt— is  concerned,  are  excellently  illustrated  in  the  experience 
of  cities  and  local  divisions  in  Wisconsin  and  other  states. 

The  constitution  of  Wisconsin  gives  counties  the  privilege  to 
borrow  to  the  extent  of  five  per  cent,  of  their  assessed  value,  ac- 
cording to  the  last  preceding  assessment  for  state  and  county  pur- 
poses. Supposing  this  limit  to  be  reasonable,  let  us  see  to  what 
extent  its  effectiveness  is  negatived  by  the  assessment  of  the  gen- 
eral property  tax  of  the  state.    The  average  ratio  of  assessed  to 

[87] 


^i 


8S  BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 

true  value  of  property  in  Richland  county,  for  the  ^ve  years  end- 
ing 1909,-1905  to  1909— was  48.36  per  cent.     The  similar  ratios 
for  the  same  period  for  the  adjoining  counties,  viz.,  Vernon, 
Crawford,  Sauk,  Iowa,  and  Grant  were,  respectively,  55.18  per 
cent.,  51.34  per  cent.,  53.79  per  cent.,  51.00  per  cent.,  and  65.14 
per  cent. ;  i.  e.,  the  borrowing  power  computed  in  terms  of  bor- 
rowing capacity— true  value— was  from  3  per  cent,  to  17  per 
cent,  higher  for  the  last  named  counties  than  for  Richland.     The 
variations  of  the  ratios  of  assessed  to  true  value  for  all  the  coun- 
ties of  the  state,  1905  to  1909,  inclusive,  are  indicated  by  the  fol- 
lowing frequency  table.* 

Ratio  of  assessed  to  true  value. 
Number  of  counties.  ( per  cent. ) 

2 30.00  to  39.99 

17    40.00  to  49.99 

32   50.00  to  59.99 

14   60.00  to  69.99 

6 70.00  to  79.99 

Interpreted  in  terms  of  power  to  borrow,  these  results  give  the 
counties  with  an  assessed  value  70.00  to  79.99  per  cent,  of  their 
true  value,  practically  double  the  borrowing  power  of  those  with 
assessed  value  at  40.00  to  49.99  per  cent.  The  question  is  not 
now  whether  counties  should  borrow  5  per  cent,  or  nothing  at  all; 
it  is  whether  assessed  value  of  property  is  a  satisfactory  base 
upon  which  to  measure  borrowing  capacity. 

The  same  sort  of  an  analysis  may  be  extended  to  cities  in  Wis- 
cousin.  The  constitution  of  the  state  gives  to  the  cities  a  5  per 
cent,  borrowing  power  and  bases  it  upon  the  assessed  value  of 
property  within  their  limits.  The  average  ratio  of  assessed  to  true 
value  of  the  property  in  Washburn  city,  Bayfield  county,  for  the 
^ye  year  period,  1905  to  1909,  inclusive,  was  97.72  per  cent.  The 
corresponding  percentage  for  Beaver  Dam  city.  Dodge  county, 
was  44.72  per  cent.  The  chief  cities  in  Dodge  county,  for  the 
same  period,  show  the  following  percentages  of  assessed  to  true 
value  of  property :  Beaver  Dam,  44.72 ;  Waupun,  68.21 ;  MayviUe, 
44.62;  Horicon,  63.16;  Juneau,  59.22   and   Watertown    (part),' 

•  The  figures  were  compiled  from  the  records  of  the  Wisconsin  State  Tax  Com- 
mission,  and  arrived  at  on  the  basis  of  bona  fide  sales. 

[88] 


SECRIST-RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


89 


50  39.^  But  these  figures  and  those  in  the  Appendix  for  Wiscon- 
sin  are  probably  more  nearly  uniform,  and  nearer  to  true  value 
than  are  the  corresponding  figures  in  most  other  states,  yet  they 
forcibly  prove  that  assessed  value  of  property  is  an  imperfect 
base  upon  which  to  compute  borrowing  capacity. 

In  as  much  as  this  measure  is  common  among  the  states  let  us 
still  extend  our  analysis  to  cities  outside  of  Wisconsin.  The  fol- 
lowing table  shows  the  ratios  of  assessed  to  true  value  for  the  158 
cities  of  the  United  States  with  population  over  30,000  in  1908. 

TABLE  P 

TABLE  SHOWING  THE  RATIOS  OF  ASSESSED  TO  TRUE  VALUE  OP  PROPERTY 

FOR  CIllES  OF  UNITED  STATES  WITH  POPULATION  OVER  30,000,  1908. 

(OOO's  omitted.) 


Ratio  of  assessed 
to  true  value. 

Per  cent 


0-19.99. 
20-24.99. 
25-29.99. 
30-34.99. 

40—44.99. 
45-49.99. 
50-54.99. 
55—59.99. 
60-64.99. 
65—69.99. 
70—74.99. 
75—79.99. 
80—84.99. 
85-89.99. 
90-94.99. 
95-99.99. 
100  


Total. 


Minimum. 
Maximum. 


Over 
300 

No. 


100-300 
No. 


1 


3 
1 


16 

15% 
100<^ 


6 
1 
2 
1 
4 
1 


50-100 
No. 


2 
2 
2 
2 


30 

15% 
100% 


3 
4 
2 

4 
4 


1 

1 

17 


30-50 
No. 


2 
1 
1 


8 
4 
7 
9 
3 
3 
3 
1 
2 


17 


47 

20% 
100% 


Co 

15% 
100% 


Total 
No. 


4 

4 
2 
1 
3 
6 
2 

15 
4 

19 

15 

7 

10 

12 

2 

3 

47 


158 


Distribu- 
tion. 

Per  Cent 


2.53 
2.53 
1.27 
0.63 
\M 
3.80 
1.27 
9.50 
2.53 

12.02 
9.50 
4.43 
6.33 
7.59 
1.27 
1.90 
1.27 

29.73 


100.00 


The  table  above  indicates  that  the  same  variations  in  the  as- 
sessment are  found  in  the  larger  cities — cities  where  the  use  of 
borrowed  funds  is  absolutely  necessary  and  where  there  is  con- 
stant effort  to  expand  the  limit.  Sometimes  resort  is  had  to  con- 
stitutional amendment.  The  recent  experience  of  New  York  City 
is  a  case  in  point.    Oftentimes  the  courts  are  appealed  to  hold 


'For  further  data  on  Wisconsin  see  Appendix  iv. 

[89] 


fri ! 


60 


BULLETIN  OF  THE  UNIVERSITY  OB^  WISCONSIN 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


91 


Ifflff) 


111 


that  this  or  that  is  outside  the  legal  limit.®  Even  out  and  out 
evasion  is  not  considered  bad  taste  when  circumstances  seem  to 
warrant  and  when  the  political  ring  is  in  command.  Chicago 
furnishes  an  excellent  example  of  the  effect  of  the  assessment  of 
property  upon  the  amount  of  debt  that  may  be  contracted.  The 
legal  debt  limit  is  5  per  cent,  of  the  assessed  value  of  property. 
But  property  is  assessed  at  only  about  15  per  cent,  of  its  true 
value,  and  notwithstanding  this  city  has  half  of  the  population  of 
New  York,  she  has  but  "one-eleventh  of  the  gross  indebtedness 
and  about  one-fifteenth  of  its  assessed  value  .  .  .  "*  The 
smallness  of  the  debt  of  the  city  of  Chicago  is  directly  attribu- 
table to  the  '^extremely  low  assessment. * '^^ 

Under-assessment  and  variation  are  common  to  all  tax  jurisdic- 
tions." The  iniquities  of  the  general  property  tax  are  extended 
to  the  domain  of  public  borrowing  and  discriminations  between 
localities,  similiarly  situated,  with  similar  needs  and  with  equal 
ability  to  satisfy  them,  assured.  Control  and  regulation  are  con- 
ditioned upon  the  success  or  failure  of  our  local  tax  officials  in  the 
assessment  of  a  tax  no  longer  suited  to  our  complex  industrial  life 
and  our  varied  classes  of  properties.  Such  a  scheme  of  control 
is  not  only  unscientific  but  is  absolutely  indefensible.  It  permits 
an  increase  in  the  amount  of  debt  and  a  decrease  in  the  proportion 
of  taxes  by  the  simple  device  of  increasing  the  assessed  value  and 
lowering  the  tax  rate.     Such  a  thing  is  more  than  speculation.     It 


■  Vide,  note  21  on  page  07 ;  also  Fourth  Annual  Message  of  John  E.  Reyburn, 
Mayor  of  Philadelphia,  pp.  viii-x. 

»  Wilcox,  D.  F.,  Schriften  des  Verein  fur  Socialpolitik,  vol.  123,  p.  176. 

"Wilcox,  D.  F.,  The  American  City,  p.  393. 

"The  ratios  of  assessed  to  true  value  for  472  cities,  towns,  villages  and 
school  districts,  chosen  at  random  from  all  parts  of  the  United  States,  are  as 
follows :     Commercial  and  Financial  Chronicle,  State  and  City  Supplement,  1909. 


Ratio  of  a."<sessed  to  true 
value. 


0-19.99 
20-24.99. 
25—20.99. 
S0-34.S9. 
35-^9.99. 
40-44.99. 
4.5-49.99. 
50-54.99. 
55—59.99. 


No.  of  in- 
stances. 


3 

0 
24 
55 
10 
2*) 

0 
78 

1 


Ratio  of  as.sessed  to  true 
value. 


fiO^-64.99 

6:3-69.99 

70-74.99 

75-79.99 

80-84.99 

85—89.99 

90-94.99 

95—99.99 

100  and  over 


No.  of  in- 
stances. 


68 
48 
10 
64 
21 

2 
14 

0 
45 


[90] 


has  been  practiced  time  and  time  again.^-  But  even  if  it  should 
never  be  resorted  to  the  possibility  of  so  doing  and  the  incentive 
to  so  do  are  always  present.  Thus  the  raison  d'etre  of  regula- 
tion—the guarantee  of  equality  between  the  present  and  the  fu- 
ture tax  payers — is  completely  negatived. 

Moreover,  this  scheme  of  regulation  presupposes  that  the  needs 
of  a  city,  town,  county,  or  other  municipal  corporation  for  bor- 
rowed funds  are  proportional  to  the  value  of  property.  This  is 
not  necessarily  true.  An  increase  in  the  value  of  city  property 
is  due  primarily  to  growth  in  population,  to  improvements  in  the 
arts,  to  the  perfection  of  industrial  processes  and  to  the  competi- 
tion for  advantageous  situations,  etc.  But  the  need  of  a  particu- 
lar locality  for  borrowed  funds  may  be  due  to  the  failure  of  pri- 
vate initiative  to  satisfy  collective  wants,  to  a  desire  to  increase 
general  welfare  by  methods  the  expense  of  which  cannot  and 
ought  not  to  be  added  to  the  tax  rate,  to  certain  effects  of  the 
complexity  of  social  conditions,  to  the  age  of  the  community  and 
to  the  enterprise  developed  toward  making  improvements,  etc., — 
causes  any  one  or  all  of  which  may  have  nothing  directly  to  do 
with  the  increased  value  of  property.  Increase  in  the  value  of 
property  does  indicate  ability  to  bear  tax  burden,  but  it  does  not 
explain  the  amount  of  burden  which  should  be  borne  by  the  pres- 
ent generation  by  current  tax  levy  or  by  future  generations  in  the 
form  of  long  term  indebtedness.  The  amount  of  funds  acquired 
by  the  use  of  public  credit  is  related  to  the  value  of  property  but 
only  indirectly.  The  direct  relationship  is  between  this  and  the 
total  contribution,  and  it  is  this  fact  which  is  lost  sight  of  in  any 
scheme  which  relates  debt  solely  to  the  assessed  value  of  property. 

It  would  certainly  be  wrong  to  contend  that  the  amount  of  pub- 
lic debt  bears  no  relation  to  the  value  of  property.  To  the  public 
creditor  debt  is  almost  solely  related  to  it  since,  in  most  communi- 
ties, the  only  source  of  public  credit  is  taxable  wealth.  But  to 
say  that  the  necessary  regulation  of  public  borrowing  is  accom- 
plished when  debt,  equivalent  to  a  certain  per  cent,  of  the  value 
of  taxable  property  is  allowed,  is  equally  incorrect.     Borrowing 


«  Vide,  the  references  to  the  practice  in  New  York  City  in  1903,  and  in  Phila- 
delphia a  year  or  two  later,  in  State  and  Local  Taxation,  Second  International 
Conference.  1909,  p.  537.  See  also.  Allinson,  E.  P:,  and  Penrose,  Boise,  Phila- 
delphia: A  History  of  Municipal  Development,  (Philadelphia,  1888)  pp.  276- 
277. 

[91] 


92 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


SECRIST-RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


93 


involves  far  more  than  the  amount  of  debt.  To  the  tax  payer  it 
involves  the  purpose  of  debt,  payment  of  debt,  equalization  of 
burden  between  the  present  and  the  future,  etc.  The  amount 
must  be  reasonable  and  suited  to  the  economic  and  political  needs 
of  the  public  corporation  employing  it.  Like  taxes,  since  both 
are  levies  upon  private  income,  it  must  find  its  justification  in  the 
results  arising  out  of  its  utilization.  What  is  demanded  is  a  rea- 
sonable return  for  a  given  outlay  and  the  financial  means  best 
adapted,  when  all  interests  are  considered,  should  receive  the  sup- 
port of  the  tax  payer.  ^^ 

Another  important  objection  may  be  made  to  the  assessed  value 
of  property  as  an  adequate  base  upon  which  to  compute  debt.  In 
the  assessment  of  property  for  purposes  of  taxation,  that  owned 
by  public  corporations  is  not*  placed  on  the  tax  roll,  and  so  we 
have  the  interesting  anomaly  of  corporations  with  the  most  prop- 
erty having  the  least  borrowing  power.  But  it  is  said,  the  major 
part  of  such  property  is  non-revenue  bearing  and  cannot,  there- 
fore, support  public  credit,  and  that  the  debt  contracted  for  reve- 
nue bearing  properties  is,  in  most  constitutions,  outside  of  the 
debt  limit.  This  is  conceded,  but  concerning  the  latter  practice 
more  will  be  said  later.  The  foundation  of  credit  in  public  econ- 
omy is  the  taxing  power — it  is  this  upon  which  the  creditor  con- 


"The  relationship  between   the  amount  of  debt  to  be  contracted,    and    the 
taxes  occasioned  thereby  to  keep  up  the  interest  charges  and  provide  for  pay- 
ment when  the  principal  falls  due,  is  expressd  in  the  French  regulations  cover- 
ing communal  debt.     Municipal  councils  may  vote   loans  for  ordinary  purposes 
up  to  thirty  year  payment  periods,  so   long  as  the  assessments  occasioned  by 
them  do  not  exceed  five  "additional  centimes"'  on  the  "extraordinary"  taxation 
during  a  period  of  five  years.     Loans  running  within  the  same  period,  but  neces- 
sitating more  centimes,  must  have  the  approval  of  the  Prefect  of  the  Depart- 
ment in  which  the  locality  is  situated.     Those  loans  running  more  than  thirty 
years,  or  exceeding  a  million  francs,   must  be  approved  by  Decree  of  the  Presi- 
dent, issued  in  Council  of  State,  and  then  only  after  he  has  been  supplied  by 
the  municipal  council  with  data  on  the  nature  of  the  proposed  expenditure,  the 
rate  of  interest,  the  method  and  period  of  redemption,  the    population    of    the 
commune  and  the  details  of  the  last  communal   budget.     Besides  this  informa- 
tion, a  certificate  from  the  mayor  setting  forth  the  obligations  of  the  commune 
with    their   duration,    nature   and    date    of   laws    or   authorizations    for   them, 
must   accompany    the    request.     See    "Municipal    Taxation    in    European    Coun- 
tries."    Special  Consular  Reports,  vol.  XLII,  pt.  II,  1910,  p.  20;  Grice,   J.  W., 
National  and  Local  Finance,   pp.  335-336;  Berthelemy,  H.,  Traits  iUmentaire 
de  droit  administratif,  pp.  350  fla. 

The  same  principle  is  adopted  in  the  regulation  of  municipal  borrowing  in 
Quebec,  Canada,  where  bonds  which  require  interest  and  sinking  funds  or  In- 
terest and  installment  of  principal  payments  in  any  one  year  in  excess  of  50 
per  cent,  of  the  total  annual  revenue,  may  be  issued  only  upon  the  authority 
of  the  Lieutenant  Governor  in  Council.  Chamberiain,  Lawrence,  The  Principles 
of  Bond  Investments.     (New  York,   1911). 

[92] 


stantly  relies.  Taxes  in  the  United  States  are  computed  upon  the 
assessed  value  of  property,  but  the  real  source  of  credit— the  wiU- 
ingness  to  endure  taxation— has  little  relation  to  this  assessing 
expedient.  The  assessment  can  be  low,  high  or  indifferently 
made,  and  this  of  itself,  have  little  connection  with  the  people's 
willingness  to  contribute.  The  point  insisted  upon  is  that  the 
willingness  to  pay  taxes  and  to  support  credit  is  antecedent  and 
the  method  of  acquiring  the  contribution  subsequent.  But  the 
constitutional  requirements  consider  only  private  property.  The 
value  attached  to  public  property  is  ignored  because  it  is  non- 
revenue  bearing,  even  though  its  existence  does  indicate  an  ability 
and  a  willingness  to  pay  and,  therefore,  supports  credit. 

Indeed,  properties  such  as  public  buildings,  bridges,  street  im- 
provements, sewerage  plants,  parks,  etc.,  although  they  yield  no 
net  return  and  are  a  heavy  drain  upon  the  taxes,  are  precisely 
the  things  which,  as  works  of  utility,  convenience,  and  ornamen- 
tation, add  to  the  value  of  private  holdings  and  serve  as  addi- 
tional security  upon  which  credit  may  rest.^*     One  would  hardly 
claim  that  the  presence  of  212  parcels  of  land  and  other  property, 
including  churches,  schools,  hospitals,  lodges,  etc.,  with  an  ap- 
proximate value  of  three  million  dollars,^^  together  with  the  Uni- 
versity grounds  and  buildings,  all  of  which  are  tax  exempt,  do 
not  materially  affect  the  credit  of  Madison  as  a  borrowing  unit. 
And  yet  all  of  these  factors,  so  vital  in  the  determination  of  the 
actual  rate  of  interest  at  which  municipalities  can  borrow,  are 
totally  ignored  by  the  requirement  which  bases  debt  solely  upon 
the  assessed  value  of  property. 

Instances  are  not  unheard  of  where  city  property  has  been  sold 
to  satisfy  debt  obligations.  It  represents  an  accumulated  fund, 
and  one  upon  which  a  city  can  realize  in  case  of  appoaching  bank- 
ruptcy. Property  shows  an  ability  to  pay ;  the  taxes  levied  and 
the  permanent  properties  acquired  as  a  result  of  expenditure  aro 
evidences  of  a  willingness  to  pay,  and  it  is  the  latter  which  sup. 
ports  credit  because  taxes  are  levied  by  the  people  who  actually 
make  the  contributions.  This  is  not  a  tremendously  important 
matter  in  the  smaller  cities  because  the  value  of  municipal  prop- 


"See   Crozier.   J.   B„  The  First  Principles  of  Jniesfment.     (London.  1911.). 
p.  53      See  also.  Muhlman.  Maurice,  "Municipal  Bonds  and  Municipal  Credit. 

Bankers  Law  Journal,  August,  1911,  p.  642.  ,    t„„    iq    iqii 

"Madison  City  Assessor  in  the  Wisconsin  State  Journal,  Jan.  IS,  l»il. 

[93] 


fiiii 


94 


• 


''iil 


ii» 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


erties,  except  m  a  comparatively  few  instances,  would,  if  added 
to  the  assessment  of  private  property,  not  materially  affect  their 
borrowing  power.  It  is  mentioned  in  this  connection  only  be- 
cause  It  seems  fundamentally  unsound  to  make  borrowing  power 
for  public  corporations,  inversely  proportional  to  value  of  prop- 
erty owned,  while  in  private  companies,  with  which  public  corpo- 
rations are  often  brought  in  competition,  and  by  the  standards  of 
which  municipal  enterprise  is  often  judged,  borrowing  is,  othe;r 
things  being  equal,  directly  proportional  to  property 

When  municipalities  are  viewed  as  administrative  areas  alone 
as  aids  in  carrying  out  a  central  policy,  it  is  conceivable  that  some 

1  /.\  T  '''"''  '^  P'^^^'  '^  ^^^  ^~*  o^  --me  that 
should  be  devoted  to  public  uses.    But  when  they  are  viewed  as 

corporations  created  to  insure  to  their  members  the  conveniences 
no trr?''  "^  ^""''  government,  it  is  submitted  that  there  is 

end  IS  always  the  most  economic  satisfaction  of  wants.  Some 
wants  are  public,  others  are  private,  and  the  shifting  of  them 
from  the  one  category  to  the  other  makes  difficult  any  a  prZ 

luZTl       ''^  ~"'  '^  '^  appropriated  by  taxation  o" 
acqui  ed  by  borrowing.     The  amount  of  debt  that  a  community 
should  incur  is  not  an  arbitrary  percentage  of  an  iU-defined  as 
sessment,  but  that  part  of  the  total  burden  which  the  pei  are 
willing  to  shoulder  which  justly  and  economically  cannotte  as 
Zot    ''  "^'Tr'  --^--^-borne  by  the  present     There 

?r  TT."  ''''  ^"  ''-''''  '^"^^^  ^^-  -  ^^e  failure  to  pay 
debt.  And  here  again  the  constitutional  limitations  are  open  to 
criticism  This  leads  to  a  consideration  of  the  time  which  a  pub- 
lie  debt  should  be  allowed  to  run. 

The  justification  of  incurring  long  time  indebtedness  is  to 
equalize  the  burden  of  public  expenditure  between  the  present 
and  the  future  tax  payer.  Some  expenditures  are  necessary 
from  which  the  chief  benefits  are  realized  in  the  future  or  which 
endure  through  a  period  of  time,  and  it  is  only  just  that'those  who 
receive  the  benefits  should  bear  the  expense.  This  equalization 
can  be  effected  by  making  the  duration  of  loans  approximately 
equivalent  to  the  life  of  the  properties  acquired.  That  debts 
should  be  paid  IS  recognized  in  the  maturing  periods  placed  in 

[94] 


SECRIST-RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


95 


our  constitutions.     But  unfortunately,  the  laws  which  provide 
for  the  use  of  the  borrowing  power,  far  too  frequently  extend  the 
period  to  the  maxima  named  in  the  constitutions.     These  periods 
are  always  taken  advantage  of  by  city  officials  who,  through  inex- 
perience in  handling  loans  or  through  choice,  put  off  the  day  of 
settlement  as  long  as  possible.    Milwaukee,  Wisconsin,  issues  all 
her  bonds  for  twenty-year  periods,  and  among  such  issues  are 
Bath  bonds,  Bridge  bonds,  Viaduct  bonds,  City  Hall  bonds,  Dock- 
ing and  Dredging  bonds.  Emergency  Hospital  bonds,  J^re  I)e- 
partment  bonds.  Park  bonds.  Refunding  bonds,^«  eto.     St.  Paul, 
Minnesota,  with  an  outstanding  debt  of  $9,040,000  on  January  1, 
1909    showed  82  distinct  issues  of  bonds,  all  running  thirty 
years.     Among  these  were  Work  House  bonds,  Building  bonds, 
Park  bonds,  Macadamizing  bonds,  Court  House  bonds.  Sewer  Con- 
nection bonds,  etc.-     Of  the  130  different  cities  of  the  Umted 
States  with  population  over  30,000  in  1908,  which  issued  bonds  in 
that  year,  the  average  period  in  16  cities  was  less  than  ten  years 
in  65  cities,  10  to  22  years,  in  36  cities,  22  to  31  years,  and  m  13 
cities,  31  to  51  years.    But  16  per  cent,  of  all  the  periods  were 
between  10  and  13  years,  18  per  cent,  between  19  and  22  years, 
and  19  per  cent,  between  26  and  31  years.^«     So  long  as  the  dura- 


^^  Annual  Report  of  the  City  Comptroller,  1909,   p.  28  ffl. 
"  Annual  Report  of  the  City  Comptroller,  Jan.    1,  1909. 

^^  Statistics  of  Cities  uith  Population  over  30,000  in  1908.     The  following  data 
compiled  from  Table  36  shows  the  issues  for  various  sized  cities. 

Population. 
(OOO's  omitted). 


Year  Groups. 


Oto  3.9.. 

4  to  6.9.. 

7 to  9.9.. 
10  to  12.9.. 
13  to  15.9.. 
16tol8.9.. 
19  to  21.9.. 
22  to  24.9.. 
25 to  27.9.. 
28  to  30.9.. 
31  to  33.9.. 
34  to  36.9.. 
40  to  42.9., 
43  to  45.9., 
49  to  51.9., 


Total. 


300  or 
more. 


100  to  300. 


1 
1 
1 
3 


3 
2 
1 
2 
1 


15 


5 
3 
3 
4 
5 


5 


50  to  100. 


30 


1 
4 
5 
7 
5 
1 
6 


30  to  50. 


Total. 


1 

2 
2 
8 


1 

7 


1 
1 


39 


6 
11 


Per  cent, 
distribu- 
tion. 


4 
10 


5G 


2 
7 
7 

21 
9 

11 

24 
5 
6 

25 

9 

2 
6 
2 
1 


130 


1.54 
5.38 
5.38 

16.16 
6.92 
8.46 

18.46 
3.85 
4.62 

19.23 
1.54 
1.54 
4.62 
1.54 
0.77 


100.00 


} 


\ 


[95] 


I 


.' 


96 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


ill! 


1 


tion  of  loans  is  pushed  to  the  limits  set  in  the  constitutions,  or  al- 
lowed to  concentrate  upon  the  even  numbers,  as  10,  20,  and  30 
years,  and  so  long  as  half^^  of  the  outstanding  debt  of  our  158 
largest  cities  matures  after  a  period  of  20  years,  there  is  no  evi- 
dence of  any  conscious  attempt  to  suit  the  period  of  debt  pay- 
ment to  the  life  of  city  properties.  Again,  the  constitutional  re- 
strictions fail  to  indicate  the  proper  solution  of  this  phase  of 
public  debt. 

The  problems  involved  in  the  determination  of  the  proper 
periods  for  debt  contracts  are  economic  and  each  demands  specific 
attention.  This  is  not  a  question  of  policy  fit  for  constitutional 
statement.  There  is  no  general  rule  that  all  debt  should  be  paid 
within  a  specified  number  of  years.  Debts  should  be  paid.  This 
is  an  accepted  canon  of  public  finance :  when  they  should  be  paid 
can  be  determined  only  after  an  analysis  of  the  "life''  or  utility 
of  each  property,  and  after  general  social  policy  and  the  most  ap- 
proved experience  in  the  solution  of  this  problem  have  been  given 
due  consideration. 

The  constitutional  requirement  that  a  direct  annual  tax  be 
levied  at  the  time  a  loan  is  made,  sufficient  to  pay  the  interest  as 
it  accrues  and  to  accumulate  a  sinking  fund  to  liquidate  the  prin- 
cipal at  maturity,  is  common  to  constitutional  municipal  debt  lim- 
its.    This  measure  of  safety  is  to  insure  against  perpetual  debt, 
and  to  serve  as  protection  to  future  tax  payers.     Time  was  when 
public  credit  was  based  upon  the  accumulation  and  continuance 
of  such  a  fund.    Now,  however,  public  credit  almost  invariably 
rests  upon  the  taxing  power,  and  the  actual  presence  of  sinking 
funds  plays  little  or  no  part  in  its  determination.     The  constitu- 
tional and  legislative  requirements  that  these  be  provided  do  not 
insure  their  maintenance.    An  annual  tax  may  be  levied  in  good 
faith  but  a  fund  may  never  materialize.     Indeed,  today,  rather 
than  a  fund,  if  accumulated,  acting  as  a  guarantee  against  fur- 
ther taxation  for  the  purpose  for  which  it  is  accumulated,  it  is 
uniformly  considered  by  the  courts  as  an  offset  to  debt  obliga- 
tion,2o  in  determining  constitutional  indebtedness,  thereby  ex- 
tending the  debt  limit  by  the  amount  accumulated.     One  thing  is 

"  Op.  cit.,  "Table  24." 

"^Vide,  "Kronsbein  v.  City  of  Rochester."  78  New  York  8upp    813-  "WllHftm 
son  V.  Aldrich-  m  N.  W.  Rep.  (S.  D.)   1063,  190G.  '     ^""*°'' 

[96] 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


97 


certain,  the  tax  payer  frequently  finds  little  solace  in  the  ac- 
cumulation of  ffuch  '  *  funds. ' ' 

Many  important  questions  are  involved  in  overlapping  politi- 
cal jurisdictions  borrowing  under  general  blanket  provisions  of 
the  state  constitutions.  Ordinarily  these  documents  extend  to  all 
independent  political  corporations  the  power  to  borrow  money. 
Thus  the  amount  of  indebtedness  which  a  particular  people  may 
be  called  upon  to  endure  depends  wholly  upon  the  disposition  of 
the  legislatures  to  create  such  units.  Nebraska  and  South  Caro- 
lina limit  the  total  amount  of  debt  that  may  be  incurred  by  such 
overlapping  jurisdictions.  It  is  surprising  that  so  many  of  the 
constitutions  confuse  the  fiction  of  independent  corporations 
with  the  facts  of  local  finance.  The  device  so  artfully  conceived 
of  in  the  period  of  state  and  municipal  aid  to  railroads,  whereby 
the  people  in  one  capacity  shouldered  responsibilities  and  ex- 
penses which  they  refused  in  another,  is  still  being  operated  un- 
der our  latest  constitutions.  There  is  no  reason  why  all  political 
units  should  not  be  accorded  the  privilege  to  borrow  money  if 
there  is  sufficient  justification  for  its  use,  but  there  is  likewise  no 
reason  why  all  corporations  should  enjoy  this  privilege  to  an  al- 
most unlimited,  uncontrolled  extent  merely  because  they  happen 
to  be  termed  by  the  legislature  as  *  *  independent. '  '^^  If  the  pur- 
poses for  which  a  corporation  within  a  city,  for  instance,  wishes 
to  borrow  are  municipal,  there  are  no  economic  reasons  why  the 
debt  should  not  be  termed  municipal  and  be  charged  to  the  serv- 
ice of  government  in  that  district.  Many,  if  not  the  majority,  of 
the  so-called  independent  corporations  are  purely  administrative 
districts  created  either  to  carry  out  the  policies  of  the  states  or  to 
subdivide  the  functions  and  expidite  the  administration  of 
cities.*^    The  debts  incurred  fall  upon  the  taxpayers  generally 


*  See,  Gray,  Jas.  M.,  Limitations  of  the  Taxing  Power,  p.  1110,  for  a  state< 
ment  of  the  ruling  of  the  courts  on  this  matter.  Vide,  Abbott,  Howard  S.,  A 
Treatise  on  the  Law  of  Municipal  Corporations.     Vol.  1,  pp.  346-347. 

"The  following  independent  districts  having  borrowing  power  are  found  in 
cities  of  the  United  States  with  population  over  30.000  in  1908.  Btati»tic%  of 
Cities  with  Population  over  SOfiOO,  in  1908,  p.  22. 

School  Districts  in  72  cities. 

Park  Districts  in  5  cities. 

Sanitary  Districts  in  2  cities. 

Poor  District  in  1  city. 

Bridge  District  in  1  city. 

Water  District  in  1  city. 

District  for  Police  In  1  city. 


»;  fi 


[97] 


Ill, 
I 


I 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 

and  the  burdens  they  impose  should  be  charged  against  the  tax- 
payers whether  residing  in  corporations  independent  or  other- 
wise.    But  the  courts  do  not    so   interpret   these   provisions.*^ 
**  Without  wholly  denying  the  legislative  power  in  the  creation 
of  subordinate  governmental  agencies, '  '^*  it  would  be  impossible 
for  the  courts  to  arrest  the  evils  arising  from  the  conflict  of  jur- 
isdictions.   Nor  should  they  be  called  upon  to  formulate  and  en- 
force a  correct  principle.     The  difficulties  lie  in  the  failure  of 
constitution  makers  to  square  political  philosophy  with  actual 
facts.     Borrowing  power  ought  not  to  come  to  every  political  cor- 
poration as  by  birth-right.     It  need  not  accompany  the  taxing 
power  at  all.    When  it  is  conferred,  however,  it  should  be  ade- 
quate to  the  purposes  at  hand.     Whether  a  particular  service  is 
done  by  one  administrative  unit  or  by  another  is  important  only 
in  so  far  as  such  makes  for  economy  and  efficiency.     Under  the 
present  constitutional  limitations  what  is  or  is  not  local  debt  must 
always  remain  indefinite  because  affected  by  a  mass  of  uncertain- 
ties and  dissimilar  laws,  and  its  determination  depend  upon  the 
attitude  of  the  courts  in  deciding  the  legal  questions  involved. 

There  is  another  grave  defect  in  our  present  constitutional  re- 
strictions on  local  indebtedness.  Certain  forms  of  debt,  as 
loans  made  in  the  anticipation  of  taxes  to  be  collected,  and  debt 
for  certain  specified  purposes,  as  for  providing  water,  sewerage 
disposal,  etc.,  are  often  omitted  from  the  legal  limit.  Let  us  con- 
sider these  practices  in  the  order  named. 

The  purpose  of  temporary  indebtedness,  or  temporary  loans,  is 
to  bridge  over  the  period  from  one  tax  collection  to  another.  Ex- 
penditure is  a  continuous  process ;  taxes  are  collected  ordinarily 
but  once  a  year,  and  the  income  and  outgo   of  money  cannot 

« In  -Wilson  v.  Board  of  Trustees,"  27  .V.  E.  Rep.  m,  a  sanitary  district  is 
allowed  Independent  borrowing  powers  under  Art.  IX,  Sec.  12  of  the  Constitu- 
tion of  Illinois.  In  "Wilson  v.  The  Board  of  Education,"  etc.,  Bl  N.  W.  Rep. 
95t  (S.  D),  a  city  debt  is  not  counted  in  the  determination  of  the  debt  limit  of  a 
school  district,  although  the  district  is  wholly  within  the  limits  of  the  city. 
Conversely,  in  "Valley  v.  Board  of  Park  Commissioners,"  lU  N.  W.  Rep.  615 
(N.  D.),  1907,  school  district  indebtedness  is  not  counted  in  the  determination 
of  the  debt  of  a  city,  although  the  city  wholly  includes  the  district.  Vide,  also, 
"National  Life  Insurance  Co.,  v.  Mead,"  m  8.  D.  37;  "Kennebec  Water  District 
▼.  City  of  Waterville,"  52  Atlan.  Rep.  774,  Maine,  1902.  Vide,  also  the  interest- 
ing interpretation  of  the  New  York  Constitution  in  32  N.  E.  622.  Other  cases 
bearing  on  this  general  question  are :  "Todd  v.  aty  of  Laurens,"  26  8  E  682 
(S.  C),  1897;  "Wilcox  v.  City  of  Bluffton,"  5^  N.  E.  110,  (Ind.)  ;  "Board  of 
Education  v.  Bitting,"  9  N,  Mex.  588.  • 

**  ^ray,    -as.  M.,  Limitationa  of  the  Taxing  Power,  etc.  p.  1110. 

[98] 


SECRI ST— RESTRICTIONS  ON  tUBLIC  INDEBTEDNESS 


9» 


readily  be  adjusted  to  each  other.  Temporary  loans,  therefore, 
are  resorted  to."  They  are  frequently  justified  on  the  grounds 
that  it  is  cheaper  to  borrow  for  current  expenditures  during  the 
year,  and  to  pay  the  loans  contracted  at  the  end  of  the  year  out 
of  taxes,  than  to  deposit  the  taxes  in  banks  with  interest  at  the 
current  rate,  because  the  interest  received  will  be  less  than  the 
value  of  the  taxes  to  the  tax  payers  during  the  year.^"  Such 
loans,  because  theoretically  offset  by  taxes  to  be  collected,  are  or- 
dinarily not  computed  in  determining  constitutional  debt. 
Taxes  are  offset,  for  the  moment,  as  it  were,  but  these  loans  rep- 
resent, in  most  municipalities,  a  constantly  recurring  item  the 
interest  of  which  is  not  offset^'  but  operates  with  the  same  pres- 
sure as  do  the  interest  charges  on  funded  debt.  If  the  purposes 
of  debt  restrictions  are  only  to  prohibit  the  deferment  of  taxes, 
then  temporary  loans  may  be  computed  as  outside  of  the  debt 
limit,  providing  they  are  paid  at  maturity  and  are  not  issued  in 
amounts  exceeding-^  the  revenues  actually  collected  and  against 


»  How  far  a  city  may  anticipate  its  taxes  so  as  expend  them  in  advance  of 
their  collection,  is  often  times  before  the  court.  The  taxes  must  have  been 
actually  "levied,"  "Law  et  al.  v.  The  People  ex  rel."  87  III.  385,  599;  also 
"Fenton  v.  Blair,"  11  Utah,  78.  On  the  general  question,  see  Bankers'  Maga- 
zine (New  York),  vol.  30,  p.  946.  On  the  practice  in  New  York  City  of  indulg- 
ing in  temporary  loans,  see  Atwials  of  the  American  Academy,  etc.,  vol.  xli, 
(1912),  in  which  Mr.  William  A.  Prendergast,  City  Comptroller,  criticizes  the 
old  method,  and  outlines  the  present  plan  followed  to  collect  adequate  fundi 
to  tide  the  city  over  from  one  tax  collection  to  the  next. 

'*New  York  Advisory  Commission  on  Taxation  an  Finance,  1908,  pp.  34-35. 

"  Concerning  the  interest  on  such  loans  in  Massachusetts,  see  "Statistics  of 
Municipal  Finances,"  1907,  p.  xxvi. 

**  In  Massachusetts  cities  and  towns  for  the  fiscal  year,  1911,  tax  loans  con- 
stituted the  following  percentages  of  the  tax  levies : 

Number  of  Cities  hating 


No  tax 
loans. 

Am't  tax 

loans  not 

stated. 

Tax  loans 
not  to  ex- 
ceed tax 
levikrs. 

Percentages  which  tax  loans  constitute  of  tax  levies. 

0-20 
No. 

20-40 
No. 

40-60 
No. 

60-80 
No. 

80-100 
No. 

100-120 
No. 

120  and 
over 
No. 

Total 
No. 

3 

3 

16 

10 

1 

33 

Number 

•  of  Towns 

having 

36 

20 

16 

8 
8 

35 

38 

74 

77 

65 
81 

57 

5 

5 

321 

Total  36 

20 

16 

67 

6 

5 

354 

^ 


'- 


[99] 


I 


100 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


SECRIST— RESTRICTIONS  ON  FUBLIC  INDEBTEDNESS 


101 


ili!!!! 


'  I 


which  they  were  issued.-^  But  if  their  purpose  is  to  protect  the 
tax  payer  against  undue  or  burdensome  taxation,  then  they  are 
clearly  within  the  debt  limit,  for  the  oppression  lies  in  the  perma- 
nent interest  charge  which  they  entail  and,  of  course,  this  must 
be  made  up  from  the  taxes  collected. 

New  York  City  is  completely  converted  to  the  use  of  tempo- 
rary loans,  prefers  them  to  any  scheme  involving  half-yearly 
or  quarterly  tax  payments,  and  issued  during  January,  February, 
March,  April  and  May,  1910,  the  following  amounts  respectively : 
$12,223,325 ;  $18,323,600 ;  $9,343,000 ;  $21,396,440 ;  and  $31,828,- 
231.^*^  Of  the  total  gross  outstanding  debt  of  the  one  hundred 
and  fifty-eight  largest  cities  of  the  United  States,  in  1908,  9.3  per 
cent,  was  for  temporary  loans,  revenue  loans  and  outstanding 
warrants.^*  In  the  thirty-three  cities  of  Massachusetts  with  pop- 
ulation over  $5,000,  in  1907,  the  p^^rcentage  of  temporary  loans 
to  total  outstanding  debt  of  all  kinds  constituted  3.7  per  cent; 
while  of  the  total  interest  payments  for  all  debt,  the  percentage 
occasioned  by  temporary  loans  constituted  6.1  per  cent.  In  the 
case  of  the  sixty -five  towns  of  the  same  state  with  population  over 
5,000  in  the  same  year,  the  percentage  of  temporary  loans  to  total 
outstanding  debt  of  all  kinds  constituted  8.1  per  cent.,  while  of 
the  total  interest  payments,  the  percentage  for  temporary  loans 


That  is,  in  one  city  and  in  ten  towns  the  tax  loans  were  in  excess  of  the  tax 
levies,  while  in  sixteen  towns  the  possible  amounts  of  tax  loans  might  equal 
the  tax  levies.  For  64  per  cent,  of  the  towns  the  percentage  exceeded  40  per 
cent,  while  for  41  per  cent,  it  exceeded  60  per  cent.  For  91  per  cent,  of  the 
cities  the  percentage  exceeded  40  per  cent.,  while  for  62  per  cent,  it  exceeded 
60  per  cent. 

The  tax  loans  contracted  for  the  fiscal  year  1910,  for  all  political  divisions, 
equalled  $29,451,131 ;  and  at  the  close  of  the  year  there  was  outstanding 
^8,393,680,  or  29  per  cent.  The  total  tax  levy  for  the  fiscal  year  1910,  for  all 
political  divisions,  equalled  $70,374,391 ;  but  there  remained  uncollected  at  th« 
close  of  the  year  $12,052,970,  or  approximately  17  per  cent. 

The  figures  on  tax  loans  and  on  taxes  collected  indicate  the  prevalence  of  a 
practice  in  Massachusetts  of  borrowing  beyond  what  may  be  termed  reasonably 
safe  limits. 

These  data  were  taken  from  Report  of  a  special  Investigation  Relative  to  the 
Indebtedness  of  the  Cities  and  Towns  of  the  Commonwealth  of  Massachusetts. 
<Bureau  of  Statistics,  Boston,  April  1912). 

*•  Vide,  Report  of  the  New  York  Advisory  Commission  on  Taxation  and  Fi- 
nance, 1908,  for  an  account  of  the  practice  of  New  York  at  that  time  in  making 
such  loans  in  excess  of  the  taxes  collected. 

••  Commercial  and  Financial  Chronicle,  vol.  90,  pp.  126,  392,  649,  1000,  1255, 
1508. 

»  Statistics  of  Cities  tcith  Population  over  90,000  in  1908,  p.  244. 


equalled  12.5  per  cent.^-  These  figures  show  that  the  interest 
payments  for  temporary  loans  for  cities  and  towns  of  Massachu- 
setts constituted  from  one-eighth  to  one  sixteenth  of  the  total. 
Of  what  significance  is  the  fact  that  91.8  per  cent,  of  the  loans  in- 
curred by  the  towns  of  the  above  state,  and  92.1  per  cent,  of  the 
loans  incurred  by  the  cities  of  the  same  state,  are  paid  during  the 
year,  if  as  soon  as  cancelled,  they  are  again  negotiated !  The 
principal  appears  and  disappears,  but  the  interest  is  a  continuous 
item  and  it  is  this  which  constitutes  the  drain  upon  the  tax  payer. 
Even  in  the  field  of  temporary  debt  there  are  many  problems  that 
arise  which  call  for  careful  consideration  in  spite  of  the  present 
constitutional  restrictions  and  limitations.^^ 

The  second  point  noted  above  is  that  of  counting  as  outside  the 
constitutional  debt  limit,  debts  for  purposes  which  are  ostensibly" 
revenue  bearing.  Surrounded  by  the  safeguards  specified  in  the 
constitutions  of  New  York  and  Virginia,  some  of  the  objections 
to  this  practice  lose  their  weight.  The  objectionable  thing  con- 
sists in  allowing  a  municipality  to  omit  this  debt  from  the  consti- 
tutional limit,  and  at  the  same  time,  sell  its  bonds  upon  the  se- 
curity of  the  taxing  power.  True,  the  debt  to  be  thus  omitted, 
must,  in  the  cases  of  New  York  and  Virginia,  be  paid  from  the 
revenues  realized,  but  whether  success  or  failure  attends  the  ven- 
ture the  creditor  has  the  taxing  power  to  fall  back  upon.  If  the 
utility  or  service  supplied  is  of  such  a  nature  as  to  legitimately 
make  the  debt  contracted  not  a  burden  upon  the  taxes,  consist- 
ency would  demand  that  the  debt  be  guaranteed  by  the  properties 
themselves  or  their  earning  power.  The  creditor  is  fully  pro- 
tected, but  the  debtor,  the  tax  payer  as  distinct  from  the  con- 
sumer, may  be  imposed  upon  in  case  of  failure,  for  the  debt  is  the 
legal  obligation  of  the  municipality. 

Our  general  conclusions  of  this  chapter  may  be  summarized  as 

follows : 

1.  The  prohibitions  against  municipalities  lending  their  credit 


[100] 


'^statistics  of  Municipal  Finances,  (Boston),   1907,  pp.  62,  65,  186,   191. 

5»  In  Massachusetts,  municipal  loans  for  which  no  provisions  for  payment  are 
made,  have  recently  been  made  the  subject  of  an  elaborate  study  by  the  Bureau 
of  statistics.  Vide,  Report  of  a  Special  Investigation  Relative  to  the  Indebted- 
ness of  the  Cities  and   Towns  of  the  Commonwealth.     (Boston    1912). 

[101] 


r 


102 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


SECRIST-RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


103 


to  or  subscribing  to  the  stock  of  private  corporations  seem  justi- 
fied and  might  well  be  made  universal  and  absolute. 

2.  The  assessed  value  of  property  as  a  base  upon  which  to 
gauge  the  amount  of  debt  that  is  permissible  for  municipalities  to 
incur,  is  open  to  criticism,  (a)  because  the  assessment  of  property- 
is  imperfectly  made  thus  allowing  discrimination  between  politi- 
cal units  similarly  situated  and  similarly  able  to  borrow,  (b)  be- 
cause borrowing  may  be  and  is  indulged  in  too  freely  by  increas- 
ing the  assessment,  and  taxes  used  too  sparingly  by  lowering  the 
tax  rate,  (c)  because  such  regulation  makes  the  need  for  bor- 
rowed funds  proportional  to  the  value  of  property,  (d)  because 
no  account  is  taken  of  valuable  city  properties  not  found  on  the 
tax  roll  but  which,  nevertheless,  actively  support  public  credit. 

3.  By  fixing  the  borrowing  power  of  municipalities  at  a  fixed 
percentage  of  the  assessed  value  of  property,  a  proper  definite 
ratio  of  public  to  private  income  is  presupposed,  and  the  con- 
stantly increasing  public  needs  are,  therefore,  not  provided  for 
without  a  revision  of  the  percentage.  Constitutional  amend- 
ments are  difficult  to  get,  and  even  when  secured  they  meet  only 
the  needs  of  a  particular  time  and  place  and  are  unsuited  for  gen- 
eral application. 

4.  The  possibility  of  issuing  bonds  to  run  the  maximum  periods 
named  in  the  constitutions  is  eagerly  taken  advantage  of,  and  as 
a  result  much  of  the  debt  issued  violates  the  canon  of  taxation 
which  requires  that  the  burdens  of  taxation  be  as  equitably  dis- 
tributed between  the  present  and  the  future  tax  payers  as  the 
nature  of  the  services  growing  out  of  their  utilization  will  admit. 

5.  Sinking  funds  supported  by  taxes,  being  generally  required 
for  all  loans,  whether  productive  or  unproductive,  raises  the  ques- 
tion of  the  equities  of  the  tax  payers  and  the  consumers,  and  sug- 
gests the  further  inquiry  as  to  whether  the  consumers  as  distinct 
from  the  tax  payers  ought  not  to  bear  the  burden  for  much  of  the 
debt  which  municipalities  incur. 

6.  The  grant  of  borrowing  privileges  to  all  independent  corpo- 
rations necessarily  results  in  an  overlapping  of  tax  areas  and  an 
undue  extension  of  debt. 

7.  The  omission  of  temporary  loans  from  the  debt  limit  seems 
unwarranted,  as  does  also  the  omission  of  debt  for  certain  pur- 

[102] 


poses  supposed  to  be  revenue  bearing,  when  the  »>;«^ j«"fj 
therefore  are  secured  by  the  general  taxing  power  rather  than  by 
the  properties  themselves  or  by  their  earning  capacity. 

Much  has  been  said  concerning  the  weaknesses  and  mperfec- 
tions  of  the  constitutional  restrictions  on  local  debt.    »«*  they 
are  by  no  means  without  some  virtues.    They  were  >n»PO^  *»^ 
the  most  part  in  a  time  of  undue  speculation  and  abuse  of  pubUc 
credit,  and  at  least  had  the  salutary  effect  of  protecting   many 
municipalities  from  bankruptcy.    But  the  causes  which  produced 
them  in  the  main  no  longer  exist,  and  there  are  only  the  slightest 
chances  of  their  recurring.    Some  of  the  causes  of  abuse  stiU  re- 
main, such  as  the  corruption  that  attends  municipal  administra- 
tion, but  these  have  endured  in  spite  of  the  restrictions.    Munici- 
pal debt  has  grown  under  the  restrictions  and  will  continue  to 
erow     City  life  and  development  are  dependent  upon  its  utiliza- 
tion, and  its  legitimacy  as  a  companion  to  direct  taxation  is  ac- 
knowledged by  all.    Grants  of  aid  to  private  capital  are  rapidly 
being  supplanted  by  expenditures  involving  competition  with 
private  capital  in  furnishing  service.    The  question  then  is  how 
can  borrowing  be  legitimately  utilized  and  expenditure  of  public 
funds  regulated  so  as  to  guarantee  a  maximum  of  service  tor  a 
given  outlay.    The  control  of  public  finance  through  uniform  ac- 
counts is  in  process  of  realization,  but  the  control  of  public  debt 
in  harmony  with  present  needs  and  standards  of  efaciency  has 
hardly  been  brought  to  notice.    It  is  the  aim  of  the  next  chapter 
to  state  the  chief  problems  in  connection  with  local  debt  and  to 
suggest  some  lines  along  which  adequate  control  may  be  effected. 


F^ 


1"30:j3 


104 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


105 


CHAPTER  4 

THE  ECONOMIC  PROBLEMS  IN  MUNICIPAL  DEBT  AND 
A  SUGGESTION  FOR  THEIR  SOLUTION 

Most  of  the  problems  in  municipal  debt  relate  to  the  following 
facts  and  conditions.     (1)  Borrowing  for  most  cities  and  for 
some  other  municipal  corporations  is  a  necessity  resulting  from 
the    functions    which    they    perform.      (2)    Public    credit    is 
often  employed  when  taxation  would  be  more  legitimate.     (3) 
BorroA^ing,  although  usually  indulged  in  too  extensively  when 
not  carefully  regulated,  when  used  with  discrimination  becomes 
a  ready  and  legitimate  means  of  securing  the  immediate  use  of 
funds.     (4)  To  borrow  successfully  implies  contact  with  money 
markets  and  familiarity  with  market   conditions,   as   well  as 
a  keen  sense  of  the  rights  and  interests  of  the  borrowing  public 
Connected  with  these  general  considerations  are  most  of  the 
problems  dealt  with  in  this  chapter. 

Many  minor  political  units  and  practically  all  cities  have  im- 
portant functions  of  an  administrative  character  as  well  as  of  a 
business  nature  which  involve  the  receipt   and  expenditure   of 
large  amounts  of  public  money.     An  adequate  performance  of 
these  functions  involves,  in  most  cases,  the  use  of  borrowed  funds 
These  are  ordinarily  supplied  by  the   investing  public,    acting 
through  the  medium  of  banks  and  trust  companies.     Local  units 
therefore,  through  their  elected  officers,  bid  with  private  firms 
and  corporations  for  the  command  of  capital.     One  problem  in 
public  debt,  and  an  important  one,  is  the  equalization  of  bargain- 
mg  power  between  local  officials,  representing  the  tax  payers  and 
financial  mterests-of  guarding  against  any  betrayal  of  the  pub- 
lic and  still  protecting  the  interests  of  the  creditors 

The  methods  of  protecting  these  interests  are  quite  dissimilar. 
Municipalities  are  interested  in  selling  their  bonds  or  other  evi- 
dences  of  indebtedness  at  the  lowest  possible  interest  rates,  in 

[104] 


making  their  terms  of  the  longest  duration  possible,  in  order  to 
defer  taxation,  and  in  borrowing  as  much  as  allowable  in  order 
to  keep  down  the  tax  rate.  The  creditors  are  interested  in  paying 
the  lowest  possible  price  for  bonds,  in  securing  high  interest  rates, 
in  the  legality  of  the  issues,^  in  the  forms  which  the  instruments 
take,  in  the  time  they  are  to  run,  in  the  security  offered  and  in 
their  general  negotiability,  etc.  Safeguarding  the  interests  of 
both  parties  to  these  financial  transactions  involves  both  political 
and  economic  considerations.  The  political  side  is  concerned  be- 
cause the  public  is  acting  through  its  elected  officials,  who  in  most 
instances  hold  their  offices  for  limited  tenure  only,  and  on  condi- 
tion that  they  act  in  accord  with  the  demands  of  a  political  con- 
stituency. The  rights  of  the  public  must  in  a  measure  be  guar- 
anteed through  such  officials.  On  the  other  hand,  the  problems 
of  debt  contraction,  debt  manipulation  and  debt  payment  involve 
not  only  political  but  also  important  economic  considerations. 
Both  sides  of  these  questions  require  some  attention. 

It  is  almost  impossible  for  local  officials  to  be  efficient  and  at  the 
same  time  retain  their  offices.  Unfortunately,  efficiency  is  most 
frequently  sacrificed.  We  are  obliged  to  recognize  that  incom- 
petency, at  least,  is  too  often  the  rule  among  public  officials,  and 
particularly  so  among  those  whose  duties  are  of  a  really  construc- 
tive and  sometimes  of  a  technical  nature.  The  every  day  routine, 
for  instance,  of  tax  matters  may  be  mastered  in  every  detail  and 
yet  the  ability  and  desire  to  successfully  and  economically  float  a 
series  of  bonds — the  incurring  of  a  debt — and  to  make  proper  pro- 
vision for  paying  the  same,  be  wholly  lacking  in  an  official.  The 
use  of  a  sinking  fund,  for  instance,  to  pay  current  expenses  some- 
times proves  too  great  a  temptation  to  be  withstood.  An  official 
or  an  administration  which  has  squandered  public  money  and 
raised  the  tax  rate  inordinately  will  often  be  displaced,  but  cases 
are  almost  unknown  where  officials  have  lost  public  confidence  or 
administrations  changed  because  of  excessive  borrowing.     Oppo- 


>  "The  question  of  legality  .  .  .  has  been  proven  by  the  experience  of 
bond  buyers,  through  delays  and  annoyances  incident  to  legal  examinations 
.  .  .  to  be  the  all  important  consideration  in  trading  in  this  class  of  se- 
curities." "Report  of  the  Ohio  Committee  on  Municipal  Bonds  to  the  Presi- 
dent of  the  Ohio  Bankers'  Association."  Banking  Law  Journal,  vol.  24.  pp. 
790-792.     (1907). 

[105] 


106 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


SECRIST-RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


107 


sition  is  contrary  to  the  interests  of  the  tax  payer,  because  the 
day  of  payment  is  generally  so  far  in  the  future  that 'some  chances 
remain  of  his  not  having  to  pay,  or  at  least  of  being  better  able  to 
pay.  Spasmodic  objection  to  borrowing  may  make  itself  felt  here 
and  there,  but  the  majority  of  the  tax  payers  are  generally  willing 
to  allow  borrowing  to  continue.  Small  popular  votes  on  the 
questions  of  debt  approval  or  rejection  are  the  rule.  The  dis- 
count of  the  future  acts  as  a  potent  force  in  determining  our  ac- 
tions. Human  nature  and  the  political  control  of  our  munici- 
palities seem  to  be  in  league  with  the  abuse  of  credit ;  the  former, 
because  of  the  discount  of  the  future,  the  latter,  because  of  the 
necessity  to  please  a  constituency.  Some  regulation  of  the  power 
to  borrow  money  and  to  dispose  of  the  same  is  absolutely  neces- 
sary and  the  question  turns  upon  the  nature  of  proper  control. 

In  preceding  chapters  the  present  constitutional  control  was 
outlined  in  some  detail.  It  amounts  on  the  one  hand  to  a  prohi- 
bition  against  subsidizing  private  capital,  and  on  the  other  hand 
to  a  limitation  of  debt  to  a  certain  per  cent,  of  the  assessed  value 
of  property.  The  fundamental  weaknesses  in  such  a  scheme  of 
restriction  have  also  been  pointed  out.  There  can  be  no  percent- 
age of  debt  to  assessed  value  of  property  which  is  a  priori  correct. 
In  some  political  jurisdictions  a  five  per  cent,  limit  operates  as  no 
restrietion,2  and  yet  the  abuse  of  public  credit  is  proportionately 
as  great  as  for  units  borrowing  much  more.  In  other  cases  a  five 
per  cent,  limit  operates  as  an  obstacle  to  legitimate  enterprise.* 
There  can  be  no  single  percentage  limit  which  applies  with  equal 
legitimacy  to  all  political  units,  or  even  to  those  similarly  sit- 
uated. The  variations  in  the  limits  in  the  United  States  which 
range  from  two  and  one-half  to  eighteen,  and  in   Canada*  ap- 

u,^u\^^f  ^^^'""^  1903-1909.  Inclusive,  there  was  no  county  In  Wisconsin 
which  had  an  outstanding  debt  equal  to  fifty  per  cent,  of  the  legal  limit— five 
per  cent.— for  counties.  More  than  seventy-one  per  cent,  of  the  average  in- 
debtedness of  the  sixty-one  indebted  counties  of  the  state  for  the  period  1903- 
1909,  was  less  than  fifteen  per  cent,  of  the  legal  limit,  i.  e.  less  than  fifteen 
per  cent,  of  the  five  per  cent,  of  the  assessed  value.  These  facts  are  taken 
from  a  study  of  county  indebtedness  in  Wisconsin  which  the  author  made  for 
the  Wisconsin  Tax  Commission. 

'The  experience  of  Chicago  is  a  case  in  point.  Vide,  the  interpretation  of 
the  Mueller  Law  (Chapter  25,  Kurd's  Revised  Statutes,  1905)  May  18,  1903, 
in  "Lobdell  v.  City  of  Chicago,"  8t  N.  E.  35f, :  227  III.  218. 

•Perrj,  J.  Roy.  "Public  Debts  in  Canada."  University  of  Toronto  Studies. 
vol.  1,  pp.  70-80. 

[106] 


proach  twenty  per  cent,  are  conclusive  evidence  of  this  truth. 
Besides,  to  merely  indicate  a  maximum  to  which  all  units  may 
borrow  is  not  to  regulate  the  use  of  public  credit. 

It  may  be  that  there  is  a  percentage  of  debt  to  assessed  value  of 
property  which  for  cities  and  towns  of  a  specified  district  does 
tend  to  assume  a  certain  level,  but  that  this  percentage  should 
apply  to  all  units  alike  is  indefensible.  The  average  ratio  of  debt 
to  assessed  value  of  property  for  the  cities  and  towns  of  Rhode 
Island,  in  1907,  was  5.16  per  cent.,  and  for  1908,  5.38  per  cent. 
But  the  maximum  percentage  for  thirty-eight  civil  divisions  m 
1907  was  23.26  per  cent,  for  a  city  with  a  population  of  1,274, 
while  the  minimum  per  cent,  for  the  same  divisions  in  the  same 
year  was  0.12  per  cent,  for  a  city  of  approximately  the  same  size. 
Like  variations  are  found  in  1908.^  A  comparison  of  the  same 
nature  for  Massachusetts  cities  in  1907,  shows  a  maximum  per- 
centage  ratio  of  7.45  per  cent,  for  a  city  with  a  population  of 
97  434  and  a  minimum  percentage  ratio  of  2.47  per  cent,  for  a 
city  with  a  population  of  69,272.  Eighteen  cities,  or  55  per  cent, 
of  all  in  the  state,  showed  a  percentage  of  net  debt  to  assessed 
value  under  5  per  cent.,  while  15  cities,  or  45  per  cent,  of  all 
showed  a  percentage  of  net  debt  to  assessed  value  of  over  5  per 
cent.    Even  a  larger  variation  exists  for  the  towns— 11.04  per 

cent,  to  0.00  per  cent.® 

Both  as  a  measure  of  the  amount  of  debt  which  a  city  is  finan- 
cially  able  to  bear,  as  well  as  a  barometer  of  the  need  for  bor- 
rowed funds,  constitutionl  limitations  are  objectionable.  As  a 
code  of  regulations  in  which  the  interests  of  both  creditor  and 
debtor  are  guaranteed  they  amount  to  nothing.  The  amount  of 
funds  which  a  city  should  borrow  is  a  portion  of  the  total  contri- 
bution which  the  tax  payers  are  willing  to  make  governed  in  each 
case  by  the  uses  to  which  such  funds  are  put.  If  a  community  is 
new,  large  expenditures  are  necessary  to  effect  improvements  in- 
dispensible  to  city  development.  If  the  city  in  question  is  large 
and  growing  rapidly,  the  tax  rate  cannot  be  adjusted  so  as  to  pro- 
vide for  large  capital  expenditure,  and  resort  must  be  made  to 
borrowing.     On  the  other  hand,  in  older  communities,  in  coun- 


*  Report  on  Taxation  Lavs.     Providence,  R.  I.   (1910)   pp.  149,  155. 

•  Statistics  of  Municipal  Finances.     Boston,  1907,  pp.  66,  192. 

[107] 


Pi 


108 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


ties,  and  often  in  school  districts,  normal  expenditures  can  and 
should  be  adjusted  to  the  machinery  of  taxation.     The  necessity 
of  borrowing,  in  each  case,  depends  upon  the  activity  of  the  com- 
munity, together  with  the  position  to  which  it  has  arrived  in  sat- 
isfying cardinal  needs  and  the  policy  of  extension  which  it  has 
adopted.     How  much  a  municipality  borrows  is  largely  inconse- 
quential, providing  there  is  need  for  borrowed  funds,  and  in  case 
the  payment  of  debt  within  a  reasonable  time  is  assured.     Bor- 
rowing is  a  financial  device,  useful  when  employed  with  discretion 
and  is  hardly  liable  to  great  abuse  when  a  rigid  policy  of  liquida- 
tion is  adopted.     It  is  not  borrowing  which  is  bad  in  itself ;  it  is 
the  disposition  to  escape  tax  burden  by  borrowing  which  is  ob- 
jectionable.    The  chief  difficulty  and  the  one  to  be  corrected  is 
the  weakness  in  the  system  of  local  government  whereby  officials 
are  permitted  and  encouraged   to   borrow  for  purposes  which 
should  be  supported  by  taxation,  to  borrow  too  much  for  legiti- 
mate purposes  and  to  defer  debt  payment  too  far  into  the  future. 
Rigid  constitutional  restrictions  on  the  amount  of  debt  will  not 
correct  these  abuses.     The  only  certain  guarantee  against  their 
continuance  is  the  adoption  of  a  system  of  administrative  control 
in  which  a  competent  state  board  or  commission,  whose  sanction 
must  be  had  for  the  use  of  borrowing,  for  the  duration  and 
amount  of  money  to  be  borrowed,  etc.,  plays  a  controlling  part. 
Control  of  municipal  debt  is  a  necessary  part  of  the  control  of 
local  finance,  and  in  many  respects  the  most  urgent  part.     The 
problems  associated  with  it  call  for  detailed  consideration. 

(1)  THE  METHOD  AND  TIME  OF  DEBT  PAYMExXT 

The  chief  problem  in  debt  payment,  so  far  as  the  debtors  are 
concerned,  is  the  equalization  of  tax  burdens  between  the  present 
and  the  future.  Most  commonly,  provision  is  made  for  debt  pay- 
ment by  the  accumulation  of  a  sinking  fund,  i.  e.  "a.  fund  to 
which  a  fixed  proportion  of  the  loan  can  be  carried  .  .  .  and 
either  applied  at  once  in  the  reduction  of  the  debt,  or  invested  at 
interest  until  it  can  so  be  applied."^    Many  of  the  constitutions 

'Murray,  Alex.,   ••Municipal   Finance"'  etc.     The  Accountant,  Mar    26    1910. 
p.  445.  ' 

[108] 


SECRIST-RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


109 


provide  for  the  accumulation  of  such  funds«  by  requiring  that 
there  be  levied  direct  annual  taxes  at  the  times  loans  are  made 
and  periodically  thereafter.     The  sinking  fund,  per  se  m  public 
finance  is  a  bungling  relic  of  the  time  when  public  credit  was  so 
low,  and  public  conscience  so  little  developed,  that  bond  holders 
had  to  be  given  some  assurance  that  the  principals  of  their  loans 
would  be  paid  when  due.     But  as  a  method  of  debt  payment  and 
as  a  temptation  to  unprincipled  and  ignorant  city  officials,  not 
only  does  a  sinking  fund  clog  and  complicate  the  finances  of  a 
municipality,  but  it  has  absolutely  no  redeeming  features.     Orig- 
inally required  as  a  guarantee  to  the  creditor  and  later  as  com- 
plete protection  to  the  debtor,  it  has  now,  in  far  too  many  in- 
stances, neither  of  these  functions  because  the  **fund"  degener- 
ates into  an  ' '  account. '  '^     Taxes  may  be  levied  in  good  faith  but 
that  the  proceeds  are  kept  intact  and  invested  properly,  that  they 
are  not  used  to  pay  current  expenses,  for  instance,^^  is  never  cer- 
tain so  long  as  accounts  are  inaccurately  and  unintelligently  kept 
and  no  public  reports  made  of  them.     The  inviolability  of  this 
fund  is  the  tax  payers'  only  protection  against  double  taxation. 


•  Payment  of  debt  by  the  sinking  fund  method  is  being  replaced  to  some  de- 
gree by  the  /erial  method.     This  movement  is  praiseworthy  for  it  takes  out  of 
?he   hands  of  local    officials  the  control  of  large   sums  of  money   with   which 
comphcated   questions   arise   concerning  investments,    and   which   furnish   temp- 
aUonffor  iUegitimate  uses.     Of  the  158  cities  in  the  United  states   with  pop « 
lation   over  30.000  in   1907,     135    reported    some    serial    loans.     Stat^st^c^    of 
Cities  with   Population  over  30,000,  p.  73   (Washington,    D.    C  )     1907.     Of    the 
growing  use  of  the  serial  method  of  debt  payment  in  Massachusetts,  see  Third 
Annual    Report    of    the    Statistics    of    Municipal    Finance,    1908-1909     V.^^n. 
(Boston,  Mass..  1911).     For  a  general  comparison   of  the  two  methods  of  pay- 
ment, see  Nelson.  S.  A..  Bond  Buyer's  Dictionary,  p.  45 ;  Biddell,  Geo.,  Loans  of 
Local  Autho^Hties,  p.    34.      (London.   1910)  ;   Terr^ell,   Park,   "The   Issue  of  Mu- 
nicipal Bonds."     The  American  City,  vol.  4.  p.  57. 

•Terrell  Park.  The  AmeHcan  City,  Feb.  1911.  p.  57.  For  a  scheme  for 
handling  sinking  funds.  Vide,  Frost,  Thomas  B.,  •'Uniform  Methods  of  Handling 
a  Sinking  Fund"  in  The  Government  Accountant,  Oct.   1911,  pp.    268--74. 

>o  Vide  the  English  Parliamentary  Report,  June  16,  1909,  "The  Application 
of  Sinking  Funds  in  the  Exercise  of  Borrowing  Powers,"  [cd.  193]  where  the 
proper  uses  of  sinking  funds  are  discussed  in  great  detail.  The  uses  of  these 
funds  for  capital  expenditure,  though  questionable  in  the  United  States,  be- 
cause of  the  absence  of  administrative  control,  is  clearly  different  from  the  use 
for  current  expenses,  etc.,  against  which  we  are  not  now  assured.  An  instance 
of  this  very  nature  was  brought  to  light  recently  (1911)  in  tlie  case  of  a  promi- 
nent Wisconsin  City.  Vide,  "Bulletin  Number  543"  Sew  York  Tax  Reform 
Association  for  objections  to  such  procedure  respecting  the  contemplated  with- 
drawal of  $17,000,000  from  the  Sinking  Funds  in  New  York  State  and  their  use 
for  current  interest  and  expenses. 

[109] 


ir 


f 


1 


11 


M 


<i 


'\ 


t. 


-  '»! 


! 


110 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


The  tax  paying  personnel  may  not  be  the  same  at  the  time  the 
fund  is  misspent  as  it  is  when  resort  to  further  taxation  is  made 
necessary,  but  this  does  not  change  the  effect  of  the  misappropria- 
tion.    The  moneys  have  been  set  aside  for  a  particular  purpose 

the  payment  of  debt  obligations — and  their  use  for  purpose  not 
intended  cannot  fail  not  only  to  cloud  the  perspective  of  the  pub- 
lic relative  to  the  total  tax  levy,  but  also  to  open  the  way  for 
illegitimate  use  of  public  funds.^^     Occasions  may  arise  when 
certain  savings  would  result  from  the  application  of  sinking 
funds  to  new  borrowing  powers,  especially  when  desirable  invest- 
ments are  not  at  hand,  when  bonds  outstanding  are  not  due  and 
cannot  be  readily  purchased,  etc.    Most  of  these  difficulties,  how- 
ever, may  be  overcome  by  the  adoption  of  serial  payment.     At 
be^,   such  a  procedure   is   questionable,   and   possesses   many 
of  the  same  objections  as  the  very  prevalent  practice  of  American 
cities  investing  their  bond  issues  in  their  own  sinking  funds,"  and 
thereby  creating  a  forced  market  for  their  securities.     **For  a 
municipality  to  sell  its  bonds  to  the  sinking  fund  is  the  same  thing 
as  borrowing  from  the  sinking  fund. '  '^^     The  Local  Government 
Board  in  England,  in  its  provisional  orders,  specifically  inserts 
the  following  clause  when  dealing  with  securities  in  which  sink- 
ing  funds  may  be  invested:  *^but  exclusive  in  every  case  of  the 
securities  of  the  corporation.''^*    The    conservation    of    these 
funds  and  their  use  for  the  purposes  intended  require  honesty 
among  city  officials,  scientific  and  accurate  accounts  and  a  certain 
amount  of  publicity  or  outside  control  of  a  disinterested  and  ade- 

thrrnml'f./"'""*""^*"'"^  ^^''''■*'   ^"°"    ^®'   ^^^^'   «P-    ^^-     The  findings    of 
the  Committee  are  also  reported  in  The  Accountant,   (London).  July  10    1909 
pp.  55-63    and  July  17.  1909.  pp.  90-95.     The  Committee  concludes  "that  thi 
general  principle  involved  in  the  application  of  sinking  f unds Tn  the  exirdse  oJ 
borrowing  power  is  financially  unobjectionable."  exercise  of 

«*^J'^i^*^"^''^v*^"^  reported  city  securities  alone  as  constituting  the  assets 
other  than  cash  balances  in  their  sinking  funds;  8  cities  reported  other  invest 
ments  but  no  city  securities ;  38  reported  both  city  securities  and  Xr  invest- 
ments;  and  43  reported  cash  as  the  only  asset."     Financial  sZltts  of  CiuL 
havxng  a  Population  of  over  30,000  in  mo.     Washington    1913  "^^   ^'^  ^*"^ 

"Chamberlain,  L..  Principles  of  Bond  Investment,   a911),"  p    214-  Chandler 
190?)    '^•'  "^'^  ^^'-^-«^-  ^^^^«  Of  Boston  ana  ndnity    (Brookline.  Malr! 

"Quoted  In  Blddell,  Geo.,  Local  Loans  in  England,  p   334      Bidden    m   mm 
renting  this  and  other  clauses  remarks  that    hey   "a^e  ^ie  beit  exUnt 

with  regard  to  sinking  funds."     md,  p.  41.  "^'^^ 

[110] 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


111 


quate  sort.  Absolute  honesty  in  every  official  is  not  to  be  ex- 
pected, and  accounts  are  far  from  being  satisfactorily  kept.  To 
provide  for  these  deficiencies,  Ontario,  Canada,  for  instance,  has 
enacted  that  persons  who  are  responsible  for  diverting  money 
from  sinking  funds  are  not  only  liable  for  the  amount  diverted, 
but  are  disqualified  for  holding  municipal  office  for  two  years.^* 
Moreover,  the  failure  to  levy  the  amount  required  to  be  raised  for 
sinking  fund  purposes  in  any  one  year  brings  disqualification  for 
office  for  two  years  upon  the  members  of  the  council  so  neglect- 
ing.^^ The  same  province  has  adopted  a  further  provision  in  or- 
der to  guarantee  the  continued  existence  of  such  a  fund  after  it 
has  been  raised.  Section  8  of  the  Ontario  Municipal  Securities 
Act^^  allows  the  deposit  of  such  funds  with  the  Treasurer  of  the 
Province,  while  section  11  *®  requires  that  a  return  shall  be  made 
to  the  Treasurer  of  Ontario  showing  whether  the  sinking  fund 
for  the  year  was  raised,  how  it  was  applied  or  dealt  with  and  the 
condition  of  the  investment  in  which  the  funds  were  made.  The 
present  movement  in  the  United  States  looking  toward  uniform 
accounts  for  municipalities  and  systematic  reporting  to  a  central 
administrative  body  is  also  a  distinct  step  in  the  direction  of  ade- 
quately guarding  the  interests  of  the  tax  payers. 

The  creditor,  on  the  other  hand,  has  little  more  than  passing 
interest  in  the  strict  maintenance  of  these  funds.  The  taxing 
power  is  most  generally  adequate  security  for  the  liquidation  of 
his  claim.  Government  solvency  ' '  depends  wholly  upon  the  effi- 
ciency of  the  taxing  power  of  the  government  and  the  wealth  of 
the  private  citizens.""  Generally  speaking  municipalities  have 
but  one  way  of  meeting  their  debts.  Creditors  rely  almost  wholly 
upon  the  power  of  taxation,  and  the  probable  continued  presence 
of  taxable  values  are  carefully  inquired  about  before  public  loans 
are  accepted. 

Another  of  the  difficult  problems  in  connection  with  public 
debt  is  the  determination  of  the  proper  time  in  which  payment 


■     «  "Consolidated  Municipal  Act,"  1903,  sec.  418,  S  Ed.  VII,  ch.  19S. 

»"0p.  oit.,  sec.  418   (5). 

"8  Ed.  ril,  ch.  51   (1908). 

^*Ed.  VII,  ch.  51.  as  amended  by  9  Ed.  VII,  ch.  76  (1909). 

-^*  Statistics  of  Cities  with  Population  over  SOjOOO,  1907,  p.  18.     (Washington, 
D.  C). 

[Ill] 


1^ 


II 


(.    t 


! 


'    ' 


■ll! 


112 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


should  be  made.     Theoretically,  there  is  no  relation  between  a 
sinking  fund  and  the  life  of  an  asset.     The  purpose  of  a  sinking 
fund  is  the  payment  of  debt ;  the  purpose  of  a  depreciation  fund 
is  to  secure  the  maintenance  of  the  efficiency  of  property.     The 
latter  is  calculated  almost  wholly  according  to  its  ''use'*  or 
**life.''    But  public  debts  must  be  paid,  and  the  chief  considera- 
tion in  determining  the  proper  time  for  payment  in  respect  to  de- 
preciating property  is  its  life.    Not  all  properties,  however,  de- 
preciate at  the  same  rapidity ;  indeed,  some  do  not  depreciate  at 
all,  but  on  the  other  hand,  constantly  appreciate  in  value.     There 
can  be  no  one  period,  therefore,  for  debt  redemption  which  will 
suit  all  municipal  properties.     Twenty  years '  duration  for  bonds 
issued  to  macadamize  a  street  is  too  long,  because  on  two  or  three 
occasions  during  this  period  the  necessity  will  arise  for  repeating 
the  improvement.     On  the  contrary,  twenty  years  is  too  short  a 
time  for  bonds  issued  to  purchase  a  city  wharf  or  park,  because 
these  properties  will  almost  surely  appreciate   in   value.    And 
yet,  in  Wisconsin,  for  example,  cities  are  borrowing  for  all  city 
purposes  on  twenty  year  bonds.     This  is  wasteful,  because  of  the 
enormous  loss  through  interest  payments  and  unscientific,  be- 
cause of  the  violation  of  the  canon  of  taxation,  realizable  equality. 
Today  the  redemption  periods  concentrate  on  twenty-  and  thirty- 
year  periods.     This  would  not  be  true  if  there  existed  for  every 
state  a  competent  authority,  disinterested  in  unduly  extending 
the  period,  whose  duty  it  was  to  make  the  duration  of  loans  es" 
sentially  equal  to  the  life  of  the  property  acquired.  Questions  of 
depreciation,  involving  as  they  do  wear  and  tear,  obsolescence, 
the  effect  of  invention,  changing  methods  in  the  solution  of  prob- 
lems, etc.,  are  so  complicated  that  any  close  approximation  to  the 
**life''  or  utility  of  properties  can  be  made  only  by  experts.     To 
leave  this  problem  for  local  officials  to  solve  is  equivalent  to  leav- 
ing  it  unsolved  and  to  furnish  the  opportunity  for  wholesale 
abuse  of  credit  and  waste  of  public  money. 

England  has  set  us  an  example  in  this  respect  after  which  it 
would  be  well  worth  while  to  pattern.  Each  general  statute 
which  confers  borrowing  power  upon  local  authorities  specifies  a 
maximum  number  of  years  for  the  repayment  of  the  loans  made 

[112] 


SECRIST— RESTRICTIONS  ON  I^UBLIC  INDEBTEDNESS 


113 


under  it.    These  periods  vary  from  ten  to  sixty  years,  and  each  act 
covers  a  number  of  purposes.^®    The  determination  of  the  actual 
period  for  each  loan  is  left  to  the  government  departments — ^most 
generally  to  the    Local    Government    Board.    This    Board    is 
equipped  with  *  *  a  staff  of  engineers     .     .     .     amongst  whose 
duties  is  that  of  holding  local  inquiries    .    .     .    into  the  cir- 
cumstances under  which  it  is  sought  to  spread  the  expense  of  any 
work  over  a  number  of  years  by  raising  a  loan  for  such  work. 
Such  an  inquiry  is  in  most  cases  obligatory  under  statute,  if  the 
new  loan  will  cause  the  indebtedness  of  the  district  to  exceed  one 
year's  assessed  value.    At  these  inquiries,  the  question  of  the 
probable  durability  and  continuing  utility  of  the  work  is  gone 
into  by  the  inspector,  and  it  is  his  duty  and  that  of  the  chief  en- 
gineering inspector  to  advise  the  Board  as  to  the  period  for  which 
the  loan  should  be  sanctioned. '  '^^     Estimates  of  the  utility,  etc., 
of  works  are  made  item  by  item,  or  by  groups  of  items,  and  an 
appropriate  term  for  the  repayment  of  the  loan  fixed.     In  order 
to  avoid  the  multiplication  of  separate  loans  for  items  of  different 
duration,  the  custom  is  to  **  grant  an  equated  period  for  the  whole 
loan  which  is  arrived  at  by  considering  the  sums  required  for  each 
group  of  items,  and  the  term  assigned  to  that  group     . 
but  equation  is  not  practiced  when  the  sums  included  in  each 
group  are  large,  and  the  local  authority  expresses  a  preference  for 
separate  loans.  *'^^    The  following  are  a  few  of  the  purposes  for 


'•Borrowing  is  made  to  some  extent  under  Local  Acts,  but  the  sixty  year 
maximum  is  closely  adhered  to:  it  has  been  exceeded  but  four  times.  By 
standing  Order  173a  (1882),  the  rule  was  laid  down  that  no  committee  should 
in  any  case  allow  sixty  years  to  be  exceeded  or  grant  any  period  "disproportion- 
ate to  the  duration  of  the  work  to  be  executed,  or  the  object  of  the  loan." 
Report  of  the  Select  Committee  on  Repayment  of  Loans  by  Local  Authoritie$, 
1902,  pp.  iv,  V.  The  Public  Works  Loan  Commissioners  by  Section  II  of  the 
Public  Works  Loan  Act  of  1875,  are  directed  to  have  regard  to  the  durability 
of  the  work  when  fixing  the  period  for  which  loans  may  run. 

"  Report  of  the  Select  Committee  on  Repayment  of  Local  Loans  by  Local 
Authorities,  1902,  p.  iv.  The  Committee  thinks  it  "impossible  to  suggest  any 
more  thorough  method  of  arriving  at  the  necessary  calculations  in  the  first 
place,  than  the  local  inspections  and  inquiries  now  held  by  the  Local  Govern- 
ment Board     .      .      .,"  p.  xii. 

*»  Op.  cit.  p.  iv.  The  following  is  an  example  of  an  equated  period  for  a  loan 
for  gas  work  purposes  according  to  the  method  followed  by  the  Local  Govern- 
ment Board.     Ibid.     Appendix  1,  p.  261. 

[113] 


it 

If 


^' 


M 


i 


t^^mm  * 


m). 


mi 


•1 

I 

4 


114 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


which  the  Local  Government  Board  sanctions  loans  and  the 
periods  usually  allowed  for  repayments.  Baths,  20-30  years; 
boats,  10-15  years ;  buildings,  5-40  years ;  carts  and  vans,  10 
years;  clocks,  10  years;  culverting  watercourses,  30  years;  elec- 
tric lighting,  first  installment,  25  years ;  gas  fixtures,  2-30  years ; 
markets,  20-60  years ;  land,  60  years ;  library,  books,  5  years ;  ma- 
chinery, 10-20  years;  street  improvements,  10*30  years;  water 
supply,  5-30  years,^^  etc. 

Thus  in  England  a  conscious  attempt  is  made  to  adjust  the 
periods  of  payment  to  the  life  and  the  utility  of  properties  ac- 
quired, and  thus  to  equalize  tax  burdens  as  between  the  present 
and  the  future.  There  are  no  valid  reasons  why  the  same  could 
not  be  done  here,  and  there  is  every  reason  why  it  should  be  done. 
Borrowing  then  becomes  an  alternative  to  taxation,  and  not  a  de- 
vice to  escape  taxation. 

Our  general  conclusions  respecting  the  time  of  debt  payment 
may  be  summarized  as  follows : 

1.  Debts  should  be  paid  within  such  periods  as  experience  and 


Description  of  work 

Estimated  cost. 

Usual 
term. 

Estimated 
cost 

multiplied 

by  the  usual 

term. 

Buildings 

£2,500 

1,243 

1,500 

530 

1,000 

1,200 

530 

600 

30  years 

£75.000 

M  ains 

30 
30 
30 
20 
15 
10 

37,350 

Gasometer 

Condense  i*s 

45.000 
15.900 

Purifvers 

20.000 

Benches 

Met  ers 

18.000 
5,300 

Retorts 

2      •• 

1.200 

Total 

£■9,105 

£217,750 

£217,750  divided  by  £9,105  equals  23.9.  The  period  accordingly  allowed  is  24 
years. 

"Op.  cit..  Appendix  1,  pp.  259-261.  The  following  Is  a  rough  estimate  of  the 
proportion  which  Tarious  periods  hold  in  the  loans  of  the  leading  English  local 
authorities. 


Duration 

Proportion 

Duration 

Proportion. 

5  years 

0.2  per  cent. 

30  years 

12.0    per  cent. 

10  years 

0.2  per  cent. 

35  years 

1,0     per  cent. 

15  years 

0.6  per  cent. 

40  years 

22.8     per  cent. 

20  years 

2.1  per  cent. 

45  years 

4.1     per  cent. 

2i  years 

9.0  per  cent. 

50  years 

44.0     per  cent. 

60  years 

4.0    per  cent. 

The  Accountant,  (London)  vol.  37,  p.  152. 

[114] 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


115 


prudence  dictate,  with  the  aim  in  view  to  deal  fairly  as  between 
the  present  and  the  future. 

2.  When  properties  acquired  are  of  a  kind  which  depreciate 
and  will  need  to  be  renewed  at  frequent  intervals,  the  loans 
should  be  paid  within  their  life  or  utility. 

3.  Where  properties  are  of  a  more  permanent  character,  the 
periods  which  they  are  allowed  to  run  should  be  proportionately 
longer,  approaching  a  perpetual  debt  for  such  things  as  land  for 
parks,  etc. 

4.  A  reasonable  scale  could  with  little  difficulty  be  decided  up- 
on by  an  expert  board,  and  if  enforced,  would  go  far  toward  put- 
ting municipal  debt  payment  on  a  scientific  basis. 

5.  All  things  considered,  serial  payment  is  preferable  to  sink- 
ing fund  payment  of  public  debt. 

Another  question  arises  in  connection  with  the  payment  of  pub- 
lic debt  which  is  not  covered  by  constitutional  provisions,  and  one 
that  individual  localities  will  not  solve.  It  is  the  determination 
of  the  relations  of  sinking  funds  for  productive  and  unproductive 
properties,  and  of  sinking  funds  to  depreciation  funds.  Sinking 
funds  are  to  pay  off  debt,  but  debt  for  unproductive  and  for  pro- 
ductive properties  raises  very  different  questions  and  call  for  dif- 
ferent treatment.-*  Sinking  funds,  to  be  built  up  from  the  gen- 
eral tax  levy,  are  required  for  most  loans  irrespective  of  the  uses 
to  which  the  proceeds  are  put.  There  is  nothing  in  our  state  con- 
stitutions or  our  laws  which  provides  for  separate  treatment  of 
productive  and  unproductive  loans  in  this  regard.  Should  sink- 
ing funds  for  productive  properties  be  collected  from  the  tax 
payers  per  sef  Such  procedure  is  manifestly  unjust  unless  the 
tax  payers  and  consumers  are  identical.  This  is  seldom  the  case. 
If  debt  for  certain  properties  is  not  to  be  counted  as  debt,  in  the 
constitutional  sense,  because  the  properties  are  revenue  bearing, 
not  only  should  the  bonds  sold  to  procure  such  properties  be  se- 
cured by  their  earning  power  or  the  properties  themselves  and 
not  by  the  tax  rate,  but  the  prices  of  the  commodities  or  services 
furnished  to  the  consumer  should  not  only  cover  the  cost  of  main- 


*•  The  relations  of  depreciation  and  sinking  funds  are  treated  in  The  Economic 
Journal  (London)  vol.  xiv.  pp.  47-56;  The  Accountant  (London)  March  26,  1910, 
P-  450,  July  16,  1910,  p.  82  ffl. 

[115] 


I* 


116 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


117 


I! 


tenance  but  sinking  fund  charges  as  well.  This  fund  although 
built  up,  for  the  most  part,  from  the  earnings  of  the  properties 
could  be  supplemented  by  the  difference  between  the  rate  of  in- 
terest at  which  the  city  is  able  to  borrow  for  this  purpose  and  the 
rate  of  interest  which  would  have  to  be  allowed  on  the  bonded 
debt  of  a  private  company. 

Ordinarily,  the  accumulation  of  sinking  funds  begins  at  the 
time  moneys  are  borrowed,  but  in  the  case  of  productive  proper- 
ties, it  could  well  be  deferred  until  they  become  producing 
agents.  This  would  be  true,  however,  only  on  the  supposition 
that  the  fund  comes  out  of  the  revenues  of  the  properties." 
Moreover,  the  complicated  questions  of  depreciation  funds  and 
their  relations  to  sinking  funds  in  the  case  of  productive  proper- 
ties call  for  attention.  Should  both  charges  be  required  ?  Pri- 
vate corporations,  with  which  publicly  owned  utilities  have  to 
compete,  ordinarily  do  not  carry  sinking  funds  for  the  retire- 
ment of  their  bonds,  but  at  their  maturity  either  fund  them  or 
pay  them  with  the  proceeds  of  new  issues.-"  But  this  practice 
is  not  allowable  as  respects  public  debts,  and  jiistly  so.  Is  it  just 
to  the  present  generation  to  hand  over  to  the  future  fully 
equipped  operating  utilities  absolutely  free  from  debt?  These 
problems,  important  to  the  tax  payer,  and  involved  in  the  sub- 
ject of  payment  of  public  debt  are  not  solved  by  the  present  con- 
stitutional provisions,  nor  are  they  being  solved  by  the  bulk  of 
municipalities  that  are  undertaking  productive  enterprises.  No 
solution  can  be  found  for  them,  it  is  maintained,  outside  of  an 
especially  drawn  statute  administered  by  a  board  or  boards 
with  powers  sufficiently  wide  to  cover  not  only  the  authorization 
of  borrowing,  the  determination  of  the  kind  of  credit  instru- 
ments used  and  the  time  which  they  are  to  run,  but  also  the 
power  to  evaluate  public  properties,  to  accept  or  reject  the 
plans  of  proposed  undertakings,  and  to  guarantee  the  legality 
of  bonds  or  other  instruments  issued. 


»  Vide  the  discussion  of  this  point  in  "Municipal  Finance,  with  Special  Refer- 
ence to  Provision  and  Application  of  Sinking  and  Depreciation  Funds,"  in  The 
Accountant  (London).  March  26,  1910,  p.  445.  Vide,  also.  ParUamentary  Re- 
port by  Select  Committee  on  Repayment  of  Loans  hy  Local  Authorities.^    London, 

1902,    p.  X. 

»Vide,  Commercial  and  Financial  Chronicle  (New  York),  vol.  xlviii,  p.  235. 

[116] 


Powers  similar  to  these,  conferred  upon  administrative  bodies 
are  not  uncommon.  Outside  of  the  United  States,  regulations 
similar  to  these  are  the  rule.  In  England,  the  Local  Government 
Board  not  only  authorizes  municipalities  to  borrow  under  gen- 
eral statutes,  but  in  a  general  way,  works  out  the  details  of  pro- 
posed undertakings  by  a  competent  corps  of  engineers,  and  fixes 
the  periods  which  the  bonds  sold  to  procure  the  funds  are  to  run. 
In  much  the  same  way  these  functions  are  performed  by  adminis- 
trative authorities  in  France.  In  Ontario,  Canada,  the  Ontario 
Railway  and  Municipal  Board"  is  authorized  to  supervise  local 
municipal  accounts,-^  and  to  study  the  rates  charged  for  munici- 
pal services  in  order  to  determine  whether  the  utilities  are  oper- 
ated in  such  a  way  as  to  pay  the  debt,  together  with  the  cost  of 
maintenance  and  operation,  or  whether  the  rates  are  too  high  or 
too  low.-»  The  Board  is  also  empowered  to  guarantee  the  bonds 
issued  by  municipalities,  so  that  their  validity  is  not  open  to  ques- 
tion in  any  court  on  any  grounds  whatsoever.^® 

To  confer  similar  powers  upon  administrative  boards  in  the 
United  States  would  be  a  distinct  step  in  the  right  direction." 

"  Organized  in  1906.     6  Ed.  VII,  ch.  31. 

"  Ihid.,  sec.  57.  i 

» 7  Ed.  VII,  ch.  38,  amending  6  Ed.  VII,  ch.  31.  sec.  57. 

*  8  Ed.  VII,  ch.  51. 

w  Since  the  above  was  written  (July  1911)  the  Director  of  the  Bureau  of  In- 
dustrial Statistics  of  Massachusetts  in  a  Special  Investigation  Relative  to  the  In- 
debtedness of  the  Cities  and  Towns  of  the  Commomcealth,  (April  1912)  has  pro- 
posed for  legislation  for  the  General  Court  an  act  in  which  (section  15)  there  la 
provided  a  Board  of  Municipal  Loans  (composed  of  the  Director  of  the  Bureau 
of  Statistics,  the  Tax  Commissioner,  and  the  Treasurer  and  Receiver  General 
ex  offlciis)  to  which  petition  (section  16)  must  be  made  for  authority  to  incur' 
fund,  or  refund  debt  for  purposes  other  than  those  specified  in  sections  one  two' 
three,  six,  and  fourteen  of  the  same  act,  which  petition  must  "clearly  specify 
the  purpose  or  the  purposes,  properly  itemized,  of  the  proposed  loan,  the  period 
lor  Which  it  is  desired  to  incur  the  same,  and  the  method  by  which  the  debt  is 
to  be  paid.  If  the  board  after  an  inquiry  into  the  necessity  and  expediency  of 
the  proposed  loan,  approves  the  making  of  said  loan  upon  the  terms  proposed,  it 
shall  give  a  certificate  of  its  approval  to  the  mayor  or  other  chief  executive  offi- 

IVk^,    ^^.°'"  ^r!  1^^^"*°^^°  «^  ^  t<^^°'  as  the  case  may  be,  whereupon  the  loan 
may  be  issued.     If  the  board  shall  disapprove  the  proposed  loan,  it  shall  make  a 

af  >fi^?    .1  '^.^/?!  ^°^  °^  ^^*^  *^""  disapproved  shall  be  issued,  except 

as  hereinafter  provided  for:  provided,  however,  that  if  the  board  accompany  its 
statement  of  reasons  for  the  disapproval  of  a  loan  with  recommendations  for  a 
modification  of  the  terms  upon  which  it  is  proposed  to  issue  said  loan,  said  recom 
mendation  may  be  adopted  by  a  majority  vote  of  the  city  council  or  other  govern- 
Ing  body  and  approved  by  the  mayor,  if  the  mayor  under  the  city  charter  halthe 
veto  power,  so-called,  or  in  the  case  of  a  town  by  a  majority  vote  of  the  vote« 

« 

[117] 


I 

I 

if 


911 


i 


118  BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 

In  some  of  the  states,  the  nucleus  for  such  control  already  exists. 
In  other  states  the  machinery  exists  in  all  but  perfected  form 
In  Wisconsin,  for  instance,  the  Tax  Commission  and  the  Railroad 
Commission  act  in  cooperation  in  evaluating  public  utilities. 
The  Tax  Commission  uses  the  value  for  tax  purposes  while 
the  Railroad  Commission  considers  the  value  in  fixing  reasonable 
rates  The  Tax  Commission  supervises  municipal  accounts  and 
has  the  power  to  install  uniform  accounts,  while  the  railroad 
Commission  requires  public  utility  corporations,  both  municipal 
and  private,  to  keep  their  accounts  on  forms  provided  by  it  and  to 
report  regularly  to  this  body.  In  this  state,  therefore,  the  foun^ 
dation  for  an  almost  perfect  system  of  control  and  direction  of 
municipal  finance  has  already  been  laid.  What  are  necessary 
further  is  the  removal  of  the  constitutional  limitation  on  munici- 
pal debt,  the  passage  of  a  general  statute  covering  cities  when 
fully  classified,  and  the  conferring  on  the  Tax  Commission  and 
the  Railroad  Commission  acting  together,  such  other  powers,  add- 
ed to  those  which  they  now  have  acting  separately,  necessary  to 
a  complete  regulation  of  municipal  debt.  Such  control  should 
cover  the  total  amount  of  debt  obligations,  temporary  and 
funded,  which  a  city  may  incur,  the  amount  for  each  property 
or  use,  control  of  accounts  both  as  to  form  and  publication,  mark- 
eting  securities  and  their  certification  as  to  legality,  etc. 

It  is  not  the  purpose  of  the  writer  to  outline  a  complete  system 
of  control  or  to  draw  a  model  bill  embodying  the  points  con- 
tended  for,  which  will  serve  for  Wisconsin  or  for  any  other  state, 
but  rather  to  indicate  the  problem  which  needs  solution  and  the 
reforms  that  may  reasonably  be  expected  to  follow  from  the 
adoption  of  adequate  control. 

With  the  establishment  of  such  a  system  of  control  as  is  here 
outlined,  and  the  inauguration  of  a  scientific  and  economic  use 
of  public  moneys,  many  of  the  problems  of  municipal  dishonesty, 
with  their  source  in  incompetency  and  graft,   as  well  as   those 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


119 


nresent  and  voting  at  a  meeting  duly  warned  in  accordance  with  »aw  and  a  prop- 
erly certified  copy  of  such  vote  shall  be  forwarded  to  the  board ;  and  if  the  vote 
be  deemed  to  have  properly  authorized  the  proposed  loan  In  accordance  with  the 
recommendations  of  the  board  as  aforesaid,  the  board  shall  forthwith  approve 
the  same,  whereupon  said  loan  may  be  issued;  and  provided,  /"^'"^^ J^*»»^  "^ 
loan  shall  be  approved  under  the  provision  of  this  section  for  a  period  longer 
than  ten  years  from  the  date  which  the  securities  may  bear." 

[118] 


other  problems  associated  with  the  prevalent  tendency  to  borrow 
too  much  and  to  postpone  payment  too  long,  would  gradually  be 
solved.  Cities  will  continue  to  grow  and  the  demands  upon  the 
public  treasury  increase.  If  they  are  to  become  business  units, 
then  business  principles  must  be  adopted  and  administrative  de- 
vices multiplied  and  perfected.  Until  the  problems  outlined  in 
this  chapter  are  solved,  public  moneys  will  be  wasted  through 
debt  contracted  and  unscientifically  handled,  borrowing  power 
will  be  abused  and  the  tax  payers  pay  the  cost.  Until  some  such 
change  is  made,  the  fixed-percentage-of-debt-to-assessed-value 
will  serve  to  handicap  some  municipalities  while  leaving  to  others 
too  extended  borrowing  powers,  debt  will  be  used  where  taxation, 
alone  is  legitimate,  sinking  funds  if  provided  will  be  used  to  pay 
current  expenses,  money  will  be  wasted  by  borrowing  when, 
market  conditions  do  not  justify  loans  being  made,  and  by  un- 
dertaking enterprises  which  are  uneconomic  both  as  respects  the 
type  undertaken  and  the  service  rendered.  The  data  and  experi- 
ence which  a  board  or  commission  of  the  type  indicated  would 
accumulate,  would,  in  a  short  time,  be  of  inestimable  value  not 
only  in  directing  municipalities  as  between  private  and  public, 
ownership  and  operation,  but  would  also  serve  as  scientific  infor- 
mation upon  which  to  build  standards  of  efficiency  in  public  en- 
deavor. 

(2)  THE  MARKETING  OF  MUNICIPAL  BONDS. 

In  selling  municipal  bonds  local  authorities  enter  the  money 
market  and  bid  with  private  corporations,  etc.,  for  command  of 
available  capital.^-  Practically  no  municipal  bonds  find  their 
way  onto  the  stock  exchange,^^  but  are  sold  direct  to   banks,** 


"  The  Commercial  and  Financial  Chronicle,  vols.  88,  90,  pp.  113  and  121,  re- 
spectively reports  the  following  municipal  bonds  sold  from  1892-1909,  inclusive  r 
(ooo's  omitted). 

1892 $  83,82.3  1898 $103,084  1904 |250.754 

1893 77,421  1899 118,113  1905 183,080 

1894 117,176  1900 145,733  1906 201,743 

1895 114,021  1901 149,498  19«7 227,643 

1896 106,496  .     1902 152,846  1908 313.797 

1897 137,984  1903 152,281  1909 332,47« 

"  Of  the  gross  amount  of  negotiable  securities  of  $25,314,429,058  admitted  to 
the  New  Yorls  Stock  Exchange  as  of  June  6,  1910,  state  bonds  constituted  but 


[119] 


I' 


'It 


120  BULLETIN   OF  THE  UNIVERSITY  OF  WISCONSIN 

trust  companies  and  saving  institutions,  only  to  be  resold  to  the 
public,  to  serve  as  investments  for  their  own  savings,  or  to  be 
used  in  National  banks  as  security  against  government  deposits." 
No  difficulties  are  experienced  in  selling  municipal  bonds,  pro- 
viding there  is  a  market  for  securities  at  all,  because  the  form  of 
bond  is  desirable  and  the  security  almost  perf  ect.^«  Mr.  William 
A  Prendergast,  Comptroller  of  the  city  of  New  York,  speaking  of 
the  bonds  of  that  city,  said,  '^  There  is  no  better  security  in  the 
world  Nothing  less  than  a  cataclysm,  so  general  in  its  effect  as 
to  be  nation  wide,  can  seriously  affect  it.""  What  is  true  of 
New  York  City  is  in  large  measure  true  of  the  great  bulk  of  grow- 
ing  cities  of  the  United  States.  This  is  especially  true  of  the  is- 
sues of  large  cities  whose  bonds  are  constantly  before  the  people, 
and  whose  continued  growth  is  assured,  whose  properties  are  val- 
uable and  whose  machinery  of  taxation  is  well  developed.  If 
bonds  are  issued  according  to  law,  if  they  are  within  the  debt 
limit,  and  all  legal  requirements  have  been  properly  complied 
with,'  the  security  is  very  nearly  perfect,  for  the  holder  can  com- 
pel  payment  by  resort  to  the  courts.  Taxes  are  a  prior  lien  to  all 
other  claims,  and  their  levy  is  mandatory .^«  But  the  fact  that 
bonds  are  within  the  legal  limit  of  debt  and  issued  according  to 
law,  although  certified  to  by  appropriate  officials  at  the  time  bids 
are  made,  must  be  verified^^  by  the  buyer,  and  their  validity  is 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


121 


185,403,943 ;  New  York  City  bonds,  $422,614,600  and  other  city  securities.  $19.- 
455,000.     Annals  of  the  American  Academy,  vol.  36,  p.  89. 

«0f  the  $60,000,000  4%  per  cent,  bonds  sold  at  100-94  by  New  York  City  In 
the  spring  of  1911.  and  which  were  over  subscribed  five  times,  $48,000,000,  or  80 
per  cent,  went  to  investment  banking  houses ;  $11,500,000,  or  19.25  per  cent,  to 
insurance  companies  and  only  $500,000,  or  0.75  per  cent,  went  to  private  invest- 
ors.    "The  Recent  New  York  City  Bond  Sale."     Escher,  F.,  Harper's   Weekly, 

Feb.  11.  1911.  p.  22. 

»  $2,909,000  of  state,  city  and  railroad  bonds  were  held  for  this  purpose  by 
National  banks  on  Oct.  31,  1910.     Report  of  the  Comptroller  of  the  Currency, 

1910,  p.  20. 

»  Under  the  Aldrich-Vreeland  Banking  Act  of  May  30,  1908  circulation  to  the 
extent  of  90  per  cent,  of  the  market  value  of  municipal  bonds  may  be  taken  out, 
but  only  to  75  per  cent,  of  the  cash  value  of  commercial  paper. 

"  Comer's  Weekly,  May  6,  1911,  p.  34. 

^Vide,  Weil,  Harry  E.,  "Municipal  Bonds  Explained."  Annals  of  the  Ameri- 
can Academy,  etc.  vol.  30,  pp.  38^390.     Vide,  also  Tte  Independent  (New  York), 

vol.  65.  p.  60. 

«»  Vide,  Conway,  Thomas  Jr.,  and  Atwood,  Albert  N.,  Investments  and  Specula- 
tion, (New  York,  1911),  p.  191.  "The  Growing  Safety  of  Municipal  Bonds." 
Commercial  and  Financial  Chronicle,  vol.  Ixxxxii  (1911),  p.  1405. 

[120] 


often  not  easy  of  proof.  ' '  Municipalities  are  not  held  to  a  strict 
accounting  of  debts  and  obligations  incurred,  unless  the  same  are 
legally  incurred,  and  it  has  too  frequently  happened  that  munici- 
palities  have  sought  (and  in  cases  succeeded)  to  avoid  their  just 
obligations  upon  purely  technical  grounds. '  '*«  * '  Opinions  on  the 
subject  vary,  but  any  where  from  twenty  to  fifty  per  cent,  of  the 
aggregate  municipal  bonds  are  defective  in  the  procedure  of  their 
issue.  That  is  to  say,  flaws  are  detected  by  the  attorneys  m  their 
examinations.""  Of  course,  municipalities  may  be  made  the 
basis  of  civil  procedure  in  case  of  bad  faith,  and  this  helps  to 
compensate  for  the  disadvantages  which  the  creditors  experience 
through  changing  administrations,  new  policies,  etc.,  and  the  fact 
that  they  must  scrutinize  the  legality  of  the  issues.  The  present 
debt  limits,  which  at  best  provide  against  bankruptcy,  and  the 
presence  of  the  taxing  power  make  an  investment  in  municipal 
securities  almost  second  to  none.  Yet  they  are  not  what  they 
might  be  to  the  creditor,  and  far  from  equally  advantageous  to 

the  debtor. 

The  one  supreme  fact  in  which  the  creditor  is  interested  is  the 
right  to  enforce  the  use  of  the  taxing  power.  Indeed,  it  may  be 
said,  one  of  the  main  purposes  of  the  debt  limit  is  to  insure  the 
existence  of  such  a  proportion  between  the  amount  of  indebted- 
ness and  taxable  wealth  that  the  debts  contracted  will  in  all  cases 
be  paid.*^'  This  is  another  safeguard  extended  to  the  bond  holder. 
True,  it  prohibits,  in  most  instances,  a  too  flagrant  use  of  the  bor- 
rowing power,  but  it  at  the  same  time  woefully  lacks  all  marks  of 
an  intelligent  administrative  policy.  Not  content  with  making 
the  bonds  in  all  cases  a  lien  on  taxable  property,  an  added  precau- 
tion is  taken  to  prohibit  this  mortgage  from  tempting  the  tax- 
payer to  repudiation.  But  what  of  the  protection  to  the  tax 
payers !  Whether  the  asset  acquired  from  the  use  of  the  bor- 
rowed funds  is  properly  used,  whether  it  is  wasted  or  ruthlessly 
destroyed,  the  creditor  cares  little.     His  security  is  certain  so 


*•  Squire,  A.,  "Essential  Recitals  in  Various  Kinds  of  Bonds."  AnnaU  of  the 
American  Academy,  etc.  vol.  30,  p.  254. 

« Lownhaupt,  Frederick,  "Municipal  Bonds,  Facts  Regarding  their  Issue  and 
their  Security."     Booklet  Number  1,  {Moody's  Magazine,  1911). 

*^Vide,  Fisher,  Irving.  Elementary  Principles  of  Economics,  (Second  Prelim- 
inary Edition*)  (1911),  p.  29. 

[121] 


i 


% 

I 
I 


122 


fc     BULLETIN   OF  THE  UNIVERSITY  OF   WISCONSIN 


long  as  taxable  private  wealth  endures.  Even  in  those  compara- 
tively few  cases  where  bonds  are  seemingly  based  upon  the  earn- 
ing power  of  municipal  utilities — since  they  are  counted  outside 
the  constitutional  debt  limit  if  they' pay  the  interest  on  the  bond- 
ed debt  and  contribute  to  the  sinking  fund  a  sufficient  amount  to 
pay  the  bonds  at  maturity — the  creditor  is  safeguarded  by  the 
pledge  of  the  faith  of  the  issuing  corporations  in  case  the  proper- 
ties do  not  make  such  contributions.  In  any  case,  the  existence 
of  taxable  values  upon  which  the  city  may  legally  be  compelled 
to  levy  taxes  is  the  source  of  the  security  and  not  the  fund  accum- 
ulated for  its  payment. 

Negotiability  is  always  an  important  factor  in  the  value  of  any 
credit  instrument.*^  The  security  of  two  issues  may  be  identical, 
and  yet  the  bonds  of  well  known  place  or  places  near  financial 
markets  have  a  greater  negotiability  and  hence  greater  value  than 
these  from  places  not  so  well  known  or  so  advantageously  located. 
The  market  for  municipals  is  narrow  and  the  adoption  of  any 
measure  which  will  widen  it  cannot  but  react  upon  the  demand 
and  through  it  upon  their  value.  There  is  no  necessary  reason 
why  the  bonds  of  a  small  village  whose  population  is  enterpris- 
ing, whose  affairs  are  well  managed  and  whose  growth  is  certain 
ought  not  to  command  as  low  an  interest  rate  as  those  of  large 
cities,  providing  they  are  issued  with  as  great  a  discrimination  as 
respects  their  purpose,  form,  and  amount  and  possess  equal 
negotiability.  A  distinct  step  toward  giving  them  these  charac- 
teristics would  follow  the  certification  of  their  necessity  and  their 
legal  validity  by  some  recognized  competent  centralized  author- 
ity. The  fact  that  there  existed  such  securities  would  be  adver- 
tised broadcast  by  financial  houses  and  would  react  both  to  the 
advantage  of  the  creditor  in  a  wider  market,  and  to  the  debtor 
in  a  reduced  interest  rate. 

Such  has  been  the  experience  in  those  countries  where  certifi- 
cation has  been  put  on  an  efficient  basis.  The  Ontario  Railway 
and  Municipal  Board  says  of  their  experience  in  this  matter:  **A 
great  many  applications  were  made  to  the  Board,  although  there 


*^Vide,  "The  Better  Protection  of  Municipal  Securities",  Bankers'  Law  Jour- 
nal (1907),  vol.  24,  p.  785.  This  is  the  Report  of  the  Committee  on  Municipal 
Securities  to  the  Executive  Council  of  the  American  Bankers'  Association. 


[122] 


SECRIST-UESTUICTIONS  OS  PUBLIC  INDEBTEDNESS 


123 


were  no  irregularities  in  the  bye-laws  or  debentures   in  order 
ro  secure  the  certificate  of  the  Board,  and  thus  enable  the  mumci- 
palTt  es  to  obtain  the  highest  market  price  for  their  securities  and 
fo  facilitate  their  sale,  and  make  their  transfer  more  convenient 
and  inexpensive.    Not  only  have  the  municipalities  received  a 
better  price  for  their  securities,  but  a  great  saving  of  expense  has 
been  effected  by  the  act.    It  is  estimated  that  the  i^i^anced  price 
and  the  sa^-ing  of  expense  to  the  municipalities  will  amount  to 
thousands  of  dollars  in  each  year.'-    But  the  power  to  certify 
legality  alone  is  not  sufficient.     Its  necessary  compliment  is  the 
power"  to  certify  the  economic  necessity  of  debt  contraction,  as 
well  as  to  prescribe  the  amount  and  form  of  debt  which  is  allowed. 
In  these  respects,  the  judicial  review  provided  for  and  the  pow- 
ers  given  to  the  Supreme  Court  in  the  state  of  Georgia  to  validate 
municipal  bonds,  as  well  as  the  law  of  Colorado  which  requires 
that  refunding  bonds  be  registered  by  the  State  Auditor,  are  de- 
fective.   The  same  may  be  said  of  a  Texas  law"  which  gives  to 
the  Attorney  General  the  power  to  validate  muncipal  bonds,  as 
well  as  of  those  parts  of  the  constitutions  of  North  Dakota"  and 
Oklahoma"  which  provide  for  bond  validation. 

What  is  to  be  counted  as  debt  within  the  constitutional  limit 
should  not  be  a  subject  upon  which  the  court's  judgment  must 
constantlv  be  sought.  The  issues  at  base  are  economic  and  not 
le-al  and  while  it  might  be  possible  for  the  courts  to  formulate 
definite  legal  principles  which  would  settle  most  of  the  difficul- 
ties arising  under  the  present  hodge-podge  of  legislation  they 
have  not  so  far  done  so."  The  provisions  governing  debt  con- 
traction should  be  so  definite  and  unmistakable  as  to  prevent  un- 
due expansion  bv  ,x-sort  to  the  courts.    Borrowing  for  legiti- 


»  Ontario  Railu-,,,,  and  MunMpal  Board,  TInrd  innual  Report  1908  9-12 
»  Tide    "Report  of  tbe  Committee  on  Municipal  Securities  to  the  Eiecutive 
CouocU  ;f  tbe  American  Bankers-  Association.'     Bandera  La«  Journal,  vol.  24, 

p.  788. 

"  ConstituMon,  1889,  sec.  187. 

«  Conelitution,  IW7,  art.  x.  sec.  29.  ,„„rt..  >,.„<.  adonted 

«  "There  Is  no  established  rule  of  construction  which  the  courts  »"«/*°f' ™ 
In  defining  the  words  (what  is  debt  in  the  constitutional  sense).  The  desire  on 
their  pirt  not  to  limit  the  legal  indebtedness  of  municipalities,  "r  to  compel  the 
navment  of  a  moral  obligation  rather  than  any  fixed  rule  of  construction  has  at 
t'lm'eTinfluenced  their  decisions."  Abbott,  Howard  S.,  ATreame  on  t».  I,«»  o/ 
ilunicipal  Corporations,  (Saint  Paul.  1906),  vol.  1,  pp.  334-33o. 

[123] 


j 


124 


BULLETIN   OF  THE  UNIVERSITY  OF  WISCONSIN 


SECKIST-RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


125 


mate  purposes,  and  in  legitimate  amounts  as  demonstrated  by- 
sound  policy  and  needs  ought  not  to  be  prevented  by  rigid  con- 
stitutional provisions,  nor  debt,  contracted  in  good  faith,  and  after 
due  consideration,  be  invalidated  because  of  some  minor  errors 
that  may  have  crept  in  either  through  neglect  or  oversight  dur- 
ing the  process  of  issue.    As  it  is  today  such  errors  are  sulBficient 
to  invalidate  the  evidences  of  debt  in  the  hands  of  the  innocent 
holder"  and  to  involve  the  tax  payers  in  wasteful  and  unwar- 
ranted expenditure.     Too  often,  no  doubt,  municipal  officials 
have  taken  advantage  of  this  fact,  and  either  through  acts  of 
commission  or  omission,  have  been  able  to  sell  worthless  securi- 
ties.    This  fact,  together  with  the  enormous  amount  of  borrowing 
by  coterminous  and  conflicting  jurisdictions  for  a  multitude  of 
purposes  has  made  it  necessary  for  bond  houses  in  effect  to  vali- 
date every  issue  which  they  purchase.     This  is  expensive  and  the 
costs  are  paid  by  the  debtor  public.    A  question  essentially 
economic  in  all  its  phases  should  be  solved  by  resort  to  economic 
principles.     As  it  is  today  it  is  primarily  a  question  to  be  worked 
over  and  dissected  by  the  courts. 

Municipalities  must  borrow  money.     The  securities  which  they 
issue  are  possessed  of  those  qualities  well  suited  for  investment 
purposes.     Some  method  should  be  adopted  which    would    not 
only  check  the  extravagant  use  of  municipal  credit  and  make  it 
impossible  for  city  officials,  either  through  innocent  or  wilful  mis- 
conduct, to  flood  the  market  with  questionable   securities,    but 
which  would  also  determine  the  procedure  of  issue  and  legality 
of  securities.     A  possible  controlling  agent  has  been  outlined  in 
this  chapter,  and  in  a  broad  way,  the  powers  pointed  out  which 
are  necessary  for  scientific  control.     The  problem  is  the  adjust- 
ment of  local  debt  to  the  accepted  and  developed  lines  of  private 
finance,  an  adjustment  in  which  the  interests  of  both  creditor  and 
debtor  are  fully  conserved  and  guaranteed.     By  such  a  reform, 
expensive  law  suits  over  the  legality  and  validity  of  contested 
bonds,  far-fetched  judicial  decisions,  counting  this  and  that  with- 

"  "It  is  agreed  that  where  there  is  no  authority  for  an  issue  of  municipal  bonds 
that  the  holder,  however  full  of  faith,  is  not  protected,  and  the  bonds  are  void 
In  all  hands.-  Hill.  John  P..  "The  Advisability  of  Registering  Negotiable  Cou- 
pon Bonds  The  Green  Bag,  vol.  16.  p.  14  (1904)  ;  of.  Simonten,  T.  C,  A  Trea. 
Use  of  the  Law  of  Municipal  Bonds,  (1896)  section  124. 

[124]  -^ 


out  or  within  the  debt  limit  in  order  to  make  room  ^^^^J^/ 
needed  improvement,  or  to  curtail  an  undue  disposition  to  bor- 
rot  wouM  in  large  measure  be  displaced  by  uniformity,  pre- 

"^e  ;ll2stSht  to  be  emphasized,  therefore  are  problems 
of  control.  Control  cannot  come  through  blanket  provisions 
which  affect  the  amount  of  debt  only  and  ignore  t^e  f  ^^^que  of 
issue.  Borrowing  is  a  legitimate  method  to  provide  for  large 
capital  expenditure:  it  is  nothing  more  than  a  simple  financial 
device  commonly  employed  in  our  -^^^1^^  j^^^f^^f  f"* 
Adequate  and  enlightened  control  must  be  addressed  to  the  tech- 
nique  of  debt  creation,  where  the  problems  of  equalizing  tax  bur- 
dens between  the  present  and  the  future  show  themselves  through 
the  time  and  method  of  debt  payment,  as  well  as  to  the  technique 
of  borrowing  where  the  relations-  of  debtor  and  creditor  are  re- 
vealed in  the  determination  of  an  interest  rate. 

Public  debt  is  necessary  to  our  local  economy.    Accurate  ac 
counts,  publicity  and  control,  so  vital  as  respects  current  revenue 
•  and  expenditure,  become  doubly  necessary  when  debts  are  in- 
curred for  vast  undertakings  and  sinking  funds  accumulated 
for  their  payment.     Public   expenditures    are   increasing  pan 
pa^su  with  the  function  of  public  powers.     Larger  and  larger 
amounts  of  income  are  being  diverted  from  private  into  public 
channels,  and  borrowing  more  and  more  indulged  in.     Just  as 
there  can  be  no  fixed  percentage  of  public  to  private  income,  so 
there  can  be  no  fixed  relation  between  borrowed  funds  and  the 
total  contribution  which  a  people  are  willing  to  make.     The  nee 
essary  proportion  must  vary  from  time  to  time  and  from  district 
to  district.     Neither  can  debt  be  made  a  certain  percentage  of 
the  assessed  value  of  property.     The  criterion  for  a  proper  meas- 
ure of  the  relation  of  public  to  private  income  is  service  rendered, 
whether  public  income  shows  itself  in  taxes  paid  or  in  indebted- 
ness contracted.     Service  is  the  guiding  principle,  and  the  meas- 
ures undertaken  to  insure  this  in  the  form  of  checks  upon  the 
wastefulness  of  public  money,  whether  by  unreliable,  incompetent 
or  crooked  officials,  or  by  meaningless  accounts  etc.,  are  likewise 
applicable  to  the  control  of  public  borrowing.     The  subject  can 
be  summarized,  and  the  point  of  view  of  the  author  formulated, 

[125] 


h 


126 


BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


I 


in  the  contention  that  public  borrowing  is  neither  a  blessing  nor 
an  evil,  but  a  legitimate  financial  device,  useful  to  some  political 
units,  indispensible  to  others,  and  harmful  to  still  others,  which 
requires  for  its  proper  control  administrative  talent  of  the  high- 
est type.  Not  only  is  the  present  constitutional  control  theo- 
retically wrong ;  as  it  operates  it  is  open  to  the  serious  objections 
commented  upon  at  length  above.  As  a  scheme  of  regulation  it 
absolutely  fails  of  its  purpose.  It  was  designed  to  prevent  abuse 
of  public  credit,  and  it  was  thought  this  end  could  be  realized  by 
limiting  the  amount  to  be  borrowed.  In  some  cases,  not  only 
have  the  abuses  but  also  the  uses  of  credit  been  prevented ;  while 
in  others  its  use  has  been  flagrantly  abused  in  spite  of  the  limita- 
tions. The  limitations  were  born  originally  of  a  philosophy 
which  stamped  public  debt  as  a  public  evil,  and  this  philosophy 
still  retains  its  hold  upon  us.  The  problems  in  public  debt  are, 
however,  broader  than  curtailment  of  use ;  they  involve  regulated 
use,  and  call  for  immediate  attention.  What  is  needed  is  a  pro- 
gram of  correlation ;  correlation  of  municipal  functions  with  busi- 
ness methods,  of  creditor's  interest  with  creditor's  obligation,  of 
debtor's  sacrifice  (taxes,  etc.)  with  the  kind  and  degree  of  public 
service  furnished. 


CD  3  0 

2.ar 

as 

QD«r^ 

O 


00 

s 


[126] 


Calif. 
111. 
Iowa 
La. 

Texas 
Wis. 

00 00 00 oc  ocoo 

i(^  4^  ..•  1^  ».  .c^ 

00  U'  to  a.  00  CO 

Ind. 

Kas' 

Mich. 

Minn. 

Uiiio' 

Ore. 

Pa. 

h^  Nrt    ta^  NiA  .i^  ^^  t-^ 

OO  00  00  Ot  OD -X  00 
W  W  O  OT  iO  «»  — 
00  "^  tw  -~J  Ci  CJi  Ci 

2! 

a 
< 

*"* 

Pc-Pp* 

pc  00  Qcoc 

Tenn. 
Va. 

W.Va. 

ot  00  'X  OO 

c.  a.  w  w 

-2 

ocoo 

Idaho 
Mont. 

S.Dalc. 
Wash. 

T  oc  ot  00  00 

cr  CO  y  OC  cr> 

(C  to  «  'J  to 

1850 
18  5 

j6  cr 

ii 

I— I 
Q 

o 


d 
> 

W 

o 

cc 
> 

Q 

O 
2! 

zc 

I— ( 
H 

d 

t— ( 
o 
as 

CO 

F3 


a 


Oh 

> 
W 


C 

w 
r 

H 
O 

o 


•^3 


70 


Q 


O 
as 

cc 


r/3 

H 
O 

o 


H 

ffl 

O 

:^ 

a 

«5 


O 

d 

cc 


T3 

l-H 

O 

o 
c 

?► 

o 
:^ 

cc 


J^tal 


or:  ocoo 
c  c  o> 

I 


op  op  00 
wi  iC  *^ 


CO  <S  ^l 

5  %  :• 


OOOBOO  OO  I 

w  u;  <T.  lo 

O  4^  OO  0-. 


CD   p  m  O   — 


ffipp'd- 


p 

03 


00  00  00 :«  TO 

jfk  uj  c;  ^-vi-i 
UKwtitC.  to 


-2  <;  CC  i^*  fes"  "H 

v-  p  d— Of* 
p2Le»pS-==' 


00  00  !>3  QD  00  00 
00  00  00  00  OO  00 
to  to  to  ^  fi'  ■■£> 


p. 


ocoo 


eg 

llcT 

P  B* 


8 


as 
o 
oe 


00  00 

•f^Ob 

Earl- 
iest 
Const. 

Calif. 

Ill 

La. 

Maine 

N.  Y. 

Wis. 

1845 
to 

1849 

^-k  ^i*  k^  ^^  (»i  ^^ 
00  00  00  00  00  00 

>+-  IC  t—  ^-  ^  ♦f*' 
00  ^  cc  to  00  o 

Earl- 
iest 
Const. 

•  o  D     tr    •  p  • 

•           • 

1850 

to 

1859 

OO  -^  to  -^  —  5-  O  rji  O-  Oi 

Earl- 
iest 
Const. 

Nev. 
W.Va. 

1860 

to 

18o4 

aos*oo 
CO      0» 


p 


OOTjOO 


2  (T>  s» 
;-^  !*  "^ 


OO^OD 
CO        Vr 


Sep 

•^  K  1^ 


oo^Joo 
o.-'O  OO 
CO     c;< 


O 
O 

3 


i—M 


coC  ;0 
CO     en 


s  <^  £ 

Er  «  " 


8: 
00 


o  — -i^ 


d 
> 

o 

CO 

M 

o 

cc 

H 
I— t 

d 
o 

cc 

5d 

o 


C 

cj 
n3 

re 

d 

d 
?* 

H 
a  td 
C/j  >-t 

o2 

S  CO 
H  H 

M^ 
S^ 

ed  CD 

Hg 


as 

''^  — 

H  d 

1—4 

C3 

H 

I— ( 

O 

:? 

cc 


> 


2! 

O 

a 


so 

H 

O 


CO 

B3 
O 

w 


Ki 

Q 

O 

o 

O 

a 


state 


Maine . 


Maryland. 


Mlchicran .. 
Minnesota . 
Mississippi. 


Missouri. 


Montana.. 
Nebraslca. 


Nevada. 


New  Jersey. 
New  Yorlc... 


North  Carolina. 


North  Dakota. 
Ohio 


Oklahoma 

Oregon 

Pennsylvania.. 


Rhode  Island... 
South  Carolina. 


South  Dakota 


Tennessee 
Texas 


Utah 

Virginia. 


Washington.... 
West  Virginia. 

Wlseonsin 

Wyoming 


APPENDIX  II -TABULAR  STATEMENT  OF  THE  CONSTITUTIONAL  PROVISION'S  REI^ATING  TO  STATE  INDEBTEDNESS 


L 


Alabama 

Arizona  

California   

Colorado 

JL/P I  cl  W  ajTG*  •••••  ••■•  ••• 

Mt  lOxiCl&i*  ••••  •••••••••  ■ 

Geoi^a 

Idaho 

Illliiois  

Indiana 

Iowa 

Kansas 

Kentucky 

Louisiana 


Date  of 
constitu- 
tion 


1865 
1867 

1875 

1901 

1910 
1836 

1864 
1868 

1874 

1»49 
1879 
1902  (a) 
1908  (a) 
1876 


1897 
1838 
1865 

1875  (a) 

1885 

1868 

1877 

1889 

1848 

1870 


1908  (a) 

1816 

1851 

1846 
1857 

1855 

1858 
1859 
1850 

1890 

1845 
1852 


1864 

1868 
1879 
1898 
1848  (a) 
1868(a) 

1851 
1864 
1867 
1850 
1908 
1857 

1832 


1868 
1890 
1820 


1665 

1875 

1889 

1866-67 

1875 

1864 

1844 
1846 
1894 
1905(a) 

1868 

1876 
1889 

1851 

1907 

1857 

1857  (a) 

1873 

1842 

1868 

1895 
1889 

1870 
1845 
1866 


1876 

1895 

1850 
1864 

1870 

1902 

1889 

1861-1863 

1872 

1848 


Allowance 

for  defense, 

insurrection, 

etc. 


Art. 


IV 
IV 

X* 

XI* 
IX 


VIII 
XVI 


XI 
VIII 


IX* 
VIII 

III 

IV 


VII 
VII 

IX 

IX 

X 

XI 

II 


114 
111 


114 

111 

44* 
46* 
VI 


III 
III 
III 
XIV 
X 
IX 


IV' 


XV 


XIII 
Finance 
XII 
IX 

IV 

X 

VII 


V 

XII 

VIII 

X 

XI 
XI 
IX 
IV 


Sec 


41 
32 

3 

213 

5 

'io' 


6 

"3 

1 

37 

18 


1 

4 

4 
4 
4 

7 
35 

49 


22 

33 

34 

4 

10 

7 


96 


13 


2 
5 
1 
3 

6 

11 

3 


XIII 


VII 
VII 


VII 
XIV 


4 

18J 


24 
7 
2 
4 

13 


Allowance  for  casual  deficits,  etc. 


Amount 


JlOO,ooot 
300,000+ 
350.000 


Amount  not  limited 


300,000 
300,000 

300,000 

i-i  mill  per  dollar  of  assd. 
vai.* 

Amount  not  limited 


200,000 
li%  of  assessed  value 
50,000 

250.000 


Amount  not  limited 

100,000 
250,000 

100.000 
500,000 
100,000 
1,000,000* 
500.000 

500,000 

100,000 
100.000 


100,000 
100,000 


300,000 


50,000 
50,CKH) 
50.000 
50,000 
250,000 
250.000 


250,000*  + 
100.000 
50,000 
100,000 
300.000 

100,000 
l.OCO.OOO 
1,000,000 


1889 


IV 


XIII 
VIII 
VIII 
X 
VIII 

XVI 


33 
33 


33 


Amount  not  limited 

Amount  not  limited 
200,000* 

750,000 

400,000 

50.000 

750.000 

1,000.000 

60,000 

Amount  not  limited 

Amount  not  limited 
100.000* 


Art. 


X 

XI 
IX 


•  ••••••  ■ 


VIII 
XVI 

•  •  •      •  •  • 

XVI 
XI 


VIII 


VII 
VIII 

III 

IV 


X 

VII 
VII 

IX 

IX 

X 

XI 

II 


114 

111 


114 
111 


VI 


III 
III 
III 

XIV 

X 

IX 


IV 
XIII 

Finance 
XII 
IX 

IV 
VII 
VII 


29 


184 
2 
5 
4 

4 


100,000 
lOf.OOO 


200.000 
200.000 


Amount  not  limited 
Amount  not  limited 

Amount  not  limited 

400,000 
Amount  not  limited 
Amount  not  limited 

100, COO 

1%  of  assd.  val.  of  prop. 


V 
XII 

VIII 

X 

XI 
XI 
IX 
IV 
IX 

X 
XIII 


VII 
VII 


III 

XIV 


Sec. 


3 

213 

5 


I  •  •  •  1 


3 

1 

37 

18 


1 
2 

3 
3 
3 
5 
35 

49 


22 

33 

34 

4 

10 
5 


44 
2 
4 
1 
3 

6 

10 

2 


Provision  for  other  Debt 


Amount  not 
named 


Art. 


IV 
IV 


••••«••< 


XVI* 


XI+ 
VIII 

III* 


xit 
II 


111 

113 
111 


Sec. 


41 
32 


3-5 
3 

t  •  •  •  « 

7 


5 
36 

50 


Tax  for 


Int. 


•  •  ■  •  ■ 


Prin. 


Yes 


Yes 
Yes 

Yes 
Yes 


Yes 
Yes 

Yes* 


Yes 
Yes 


Yes 

* 

Yes 


Yes 

Yes 
Yes 


Yes 
Yes 


IV 


4 
182 


23 

7 

1 

4 

13 

7 

11 
2 


IV 

X 

XIII 
VIII 
VIII 
X 
VIII 

XVI 


33 
33 


49 
I 


29 

7 

184 
1 
5 
4 
6 

1 


V 
V 


VIII* 
X 


XI* 
IX* 


IX 
X 


III 

XIV* 


(a)  Amendment, 


IV*t 

Xt 

XIII* 
VIII 


Yes 

Yes 
Yes 


Yes 


Yes 


Yes 
Yes 

I  •  •  •  •  • 

Yes 


Yes 


Yes 
Yes 

* 

Yes 

* 

Yes 


Yes 

Yes 
Yes 


Yes 
Yes 


Duration 
loan 


25 


20 
20 

■75*  ■ 
10-15 


■  •  •  •  •  •  « 


20 


•••«••••■ 


20 
20 

10 


10 

When  due 

30 

30 

At  maturity 
When  due 


When  due 
When  due 


3 
25 


7 
11 


49* 
1 


29 

7 

184 
3 


Yes 
Yes 
Yes 
Yes 
Yes 

Yes 
Yes 
Yes 


Yes* 

Yes 
Yes 


Yes 
Yes 
Yes 


Yes 


Yes 
Yes 
Yes 
Yes 
Yes 

Yes 
Yes 
Yes 


15 
15 
15 


Approval 


Leg. 


Maj 

Maj. 


Pop. 


>  •  •  •  •  ■ 
»  *  •  •  •  < 


Maj. 
Maj. 

Maj. 
Maj. 


Maj. 

* 


Maj. 
Maj. 

Direct 


10  to  30 


13 

* 

10 


20 

35 

18 
18 
50 


Yes 


Yes 

Yes 

Yest 


Yes 


Yes 


Yes 


Yes 

Yes 

Yes+ 


30 


25 


20* 

40 
When  due 


Direct 
Maj. 


Maj.* 


Aggregate  not  above  the  amount 
named  unless  by  law 


Amount 


»  >  •  •  •  •  « 


1350.000 


!•••■•••■*< 


300,000 
300.000 

'm,m 


200.000 

H%  of  the  assessed  value 


20,000,000* 

•  •••  ••••  •••■  •■•■  ■■ 

(•••••••••••••••••I 

100,000 


100.000 

500,000 

100,000 

1.000,000 


100,000 


f* 
I* 


300,0(!0 
3,500,000* 

100,000 
100,000 
100,000 
50,000 
250.000 
250,000 


Art. 


IX 


VIII 
XVI 

xvi' 


VII 
VIII 


t  •  •  •  •  •  • 

VII 


IX 
IX 


114 


VI 
XIII 

III 
III 
III 

I  •  •  •  •  •  •  • 

IX 


Sec. 


^ot  assume 

local  or 
corporate  in- 
debtedness. 


Not  contract 

debt  for 
internal  im- 
provements 


Art. 


X* 


Sec. 


16 


•  •  •  •  •  I 


VIII*   Par.l 
XIP 


IV 


X* 


vir 


22 
m 
34 


i 

Maj. 
Maj. 


Maj. 
Maj. 
Maj. 


Maj. 


30,000,  OOOt 


100,000 

50. 0(J0 

100,000 

300.000* 

1  0,000 

1,000.000 

1,000,000 

50,000,000 


200,000 
750,000 


50,000 
750.000 
1,000,000 
50,000* 


100,000 


100,000 
100,000 


34 


Yea 


Yes 


20 


20 
5 


Maj. 


Maj. 


Maj. 


XIII 

Finance 
XII 
IX 

IV 
VII 
VII 


XII 
VIII 


XI 
XI 
IX 
IV 


XIII 


2 
4 
1 

3 

6 

10 

2 


182 
1 


7 

1 

4 

13 


56 

58 


XII 
XIV 


IX 


VIII+ 


XI* 
XI+ 
IX+ 
IV» 


VII 


200,000+ 


»•••••••' 


100,000 
1%  of  assessed val.of  prop. 


XIV 


VIII 
XVI 


33 


XIII 


XIV 

IV 
IV 

X 

XI  tl 


20 


6 


176+ 


Art. 


IV* 
IVt 
IV* 


General 
provisl'n 
VIII 


IV 


XI* 
XI* 


X+ 


X* 

X1+ 


XI* 

XI 

XI 


110' 


113 


44 

46 


Sec. 


Must  not  lend 
credit  to  pri- 
vate corpora- 
tions 


Art. 


33 
54 
93 

"6* 

7* 


36* 


177 


5 

258 


XIV* 
X* 
IX 

VII*+ 


VII* 
VII1+ 


4+ 


8 

6 

9 

13 


VIII* 
X* 


6 

28 
26 

17 

185 


Finance 


IV* 
IV+ 

IV** 


IX 

x+ 

XVI 

XI 
XII 


XI 


VIII* 

XIII 

XIII 

III 

IX 

III* 

VII 
VIII 

III 

IV 


XI 


VII 

IX 

XII 

X 


II 


113 

109+ 


112* 


5h 

58 

VI 


9 

14 

5 


6* 


XII+ 
XII 


XIII 
XI* 

*'vri+' 


X* 

XIIIT 


VIII* 
XVI+ 


183 
6 


III 
III 
III* 
XIV 
X 
IX* 


Sec. 

41 
33 

54 

**253 

7 

"h 

1 

10 
;13 


Tax  to  pay 

loan  is  irre- 

pealable 


Art. 


Sec 


4 

13 

10 

7 

10 

5 

5 

2 

38 

20 


12 


33 
177 


XII 
XIV 


IV 

XIII 
Finance 
XII 
Vlllt 

IV 

VII 

VIII* 


22 
33 
34 

6 
12 

5 


5 

258 


1 

10 
'36" 


15 
185 


10 
6 


V+ 

V* 
XII* 

VIII 

X 

XI 
XI 
IX 
IV 
XVI+ 

X 

XIII* 

II 


III 


XIII 
VIII 
VIII 
X 
VIII 

XVI* 


45 
1 

2 
3 
9 

6 

9 
10 


■••••■« 


VIII 
XVI 

xvi' 

XI 


VIII 

III 

IV 


VII 
VII 

IX 

IX 

X 

XI 


114 

111 


114 

111 


III 
III 
III 


IX 


4 
185 


IS 
7 
5 
6 

13 


11 
1 

31 


50 


12 

185 
5 
6 
6 
3 

6 


IV 

XIII 

Finance 

XII 

IX 

IV 


1 

37 

18 


22 
33 
34 


XII 


XIII 


«••••• I 


VIII 


44 
2 
4 
I 
3 

6 


182 


Must  not 
become 
stock- 
holder in 
private 
corpora- 
tion 


Art. 


XIII* 
IV 


IX 


XI 
XII 


XI 


III 

TX 

III 

VII 

VIII 

X 

IV* 


XI 

VIII 
VIII 

XVII+ 

XII 

XVII+ 

XIII 


121 

108+ 


112* 


56 
58 


III 

III 

III 

XIV 

X 


XII 
XIV 


IV 
XIII 


VIII* 


XII 
VIII 

X 

XI 
XI 
IX 


X 

XIII* 

II 

VII 
VII 


XIII 
XII 


X 

VIII 

XVI* 


Sec 


13 
54 

**25^ 
7 


10 
13 


7 
10 
5 
5 
2 
6 

20 


12 

2 
3 

8 
7 
6 
5 


177 


22 
33 
34 
6 
13 


5 

258 


49 
1 


185* 


15 
6 
5 
6 


11 
1 

31 
31 
31 


14 

185 
9 


6 
10 


*May  by  }  vote  of  Iwth  houses. 

*Never  engage  in.  +May  bj  §  vote  of  lolh 

a  bank. 
*i  Leg,  vote  necessary.  tNo  further  debt  unlit 

paid.    *Not engage  in.     **Toa  banlL 
*§  Leg.  vote  necessary.  +No  further  oeM  «MU  1 

paid.    *Not  engage  In.     ••Toabank. 

*Internal  improvements  to  be  encouraged. 

*Intemal  improvements  to  be  encouraced^^ 
♦Unless  contracted  in  time  of  war.    ^Maj  wtw 

lar consent.  ,  ,         . 

♦General  assembly  make  provisions  for 

just  and  legal  debts  of  the  Stale. 

•State  establish  highways  and  extend  aid 

♦Duration  10-15  years.    +Aggrec*t«  at  any  «■•  t 
50,000  10  3  mills  on  each  dollar  of  a 
for  public  buildings 


►By 


♦May  by  1  vote  of  all  members  of  both       _ 

♦Internal  Improvements  to  be  encoarageC. 

♦Internal  improvements  to  be  encouracM. 

♦For  public  buildings— no  limit. 

*For  this  and  refunding  onb'. 

*Is  allowed  when  the  whole  property  is  s«cunU. 

*Unless  contracted  in  time  of  war. 

•Unless  contracted  in  time  of  war. 

•Majority  of  all  votes  cast  for  mfmbers  of  1 

al  assembly.    +Encourage  inlerual  imp* 
*By  a  tax  or  from  other  source  of  revenue^ 'Mj 

ity  of  all  votes  cast  for  assembly  mfmo^rs. 

implication. 
*To  construct  deep  water  way.  etc 
*May  establish  a  state  bank. 
*Municipal  or  corporate.    +Maj  charter  a  st»t« 

with  branches. 

♦Unless  authorized  In  times  of  war  for  the 

4-l-»£\    cfotp 

*Appropriation.  +In  a  banking  institution 
*State to encourasre  internal  improvements. 
*  Appropriation.  +In  any  bank  or  bftnloiic 
*When  due.    +11,000,000  for  public  Impw 
♦Assembly  may  borrow  to  pay  slate  debt 

vote  unnecessary.  ,     1  ^i_        ^r 

*0f  all  votes  cast  at  the  general  electioo.    ^L 

authorized  in  time  of  war. 

*Not  to  exceed  eight  million  dollars,  /^c^pt  to  !■- 
ternal  improvement  companies  and  Umb  to  0«U 
one  fifth  of  their  capital  stock. 

*Except  to  internal  Improvement  comiMmcs  •■« 
then  toonli'one  fifth  of  their  capital  stock. 

♦Nothing  at  all  besides  this* 
♦Nothing  at  all  besides  this. 

♦To  assume  debt  of  municlpalitiea  contracted  in  limm 
of  war. 


for 


♦Allowed  in  three  counties. 

♦Allowed  i)y  amendment,  1906 

♦Except  the  improvement  of  ^— -,_--- 

•Allowed  to  lend  aid  for  constrocUoa  of 

and  bridges    amendment  1888.^ 
♦May  by  two  third  Leg.   vote  of  both 

to  extent  of  1*  millions  to  a  bank  wlttaoat 

vote. 

♦Appropriation  may  be  made. 
♦Internal  improvements  encouraged  and 
+May  incorporate  a  bank.    *Aai«ndni«nt 

banks  allowed  ^^  .  ,    ^  »,^   «^    .^ 

•Amendment,  1859.       +Total   debt   noC    to 

130,000,000  (amf.ndmcnl.  IBM.) 
•Duration  is  two  years.    ♦In  any  one  year. 
♦Within  a  time  limited  by  law. 
♦Or  be  a  parly  in  carrying  them  on. 

♦Except    for   extraordinary  expeoies. 
case  of  war.    *Except  for  charitable  akL 


♦Not  to  prevent  education  of  deaf.  dumb,  etc 

♦No  tax  if  treasury  contains  money  to  ke^e-p  a  stnK- 

ing  fund  of  2  per  cent. 
♦To  pay    interest   annually .    ▼Except  to 

unfinished  canals  unless  people  consent. 
♦Except  to  complete  unfinished  c*::^,  etc. 
♦30  year  period  allowed  for  these.    "^Mai-  by  a 

*Excepl  for  necessary  support  of  tbe  poi*. 
♦No  other  debt  at  all  allowed.    ♦Lnle^  m 

Mar. 

♦Unless  in  time  of  war.      ,      ,    .,         . 
♦No  other  debt  at  all.    +Unless  in  time  of  war. 
♦No  other  debt  at  all.    +Unless  in  timeof  war. 
♦Without  the  people's  consent.  ,^    ,^ 

*dO  years  allowed  lamendment  1886  Art.  Ias'^c  mJ 
+Unless  by  consent  of  i  Qualified  voters. 

♦When  due.    +Or  other  sources  of  revenue.    ^Except 

for  support  of  poor. 
♦State  ought  to  encourage  internal  im^OTementSi. 
♦Necessary  for  temporary  loan. 
♦Necessary   for  temporary   loan.    ^Max   raaraatao 

railroad  bonds  to  any  amount  not  exce«dlar  ttVJM 

per  mile. 
*No  other  debt  at  all  except  that  necessarr  tt> 
.   existing  debt.  ^^  ,    ^ 

♦Public  buildings,  $200,000.  +Over  and  abov*  tte  1 

ritorial  debt. 


♦No  other  debt  at  all.    +Except  to 

liabilities. 
♦Or  be  a  party  in  carrying  them  on.    ♦No  olfcer 

at  all. 
♦No  other  debt  at  all.    +Except  pablic 

♦Unless  incurred  in  time  of  war. 
♦Unless  Incurred  in  time  of  war. 
♦Except  where  grants  of  land  have 

such. 
♦For  all  debt  above  amount  of  taxes  of  tho 

year.    +Unle^  5  popular  vote  favor  it.    *" 

necessary  support  of  poor. 


APPENDIX  III 

CONSTITUTIONAL  RESTRICTIONS  ON  MUNICIPALITIES  LENDING  THEIR 
CREDIT  AND  SUBSCRIBING  TO  THE  STOCK    OF  PRIVATE  COMPANIES. 


States 


Alabama. 
Arkansas. 


California .. 

Colorado 

Connecticut 
Delaware — 
Florida 


Not  Lend  Credit 


Const.     Article 


■72 


•Georgia. 


Idaho 

Illinois.... 
Indiana... 
Kentucky. 
Louisiana. 


Maryland.. 
Minnesota. 
Mississippi. 


Missouri 


Montana.. 
Neb  r  as  lea. 


Nevada 

New  Hampshire. 


New  .Jersey 
New  York . 


North  Carolina. 


North  Dakota. 

Ohio 

Oklahoma 

Oregon 

Pennsylvania.. 


1875 

1901 

1868 

1874 

1879 

1876 

187 

1897 

18753 

1885 

1868< 

1877* 

1899 

1870 

1851* 

1S90^ 

1879 

1898 

1867*" 

1879^ 

1868»» 

1890 

186511 

1875 

1889' 2 

187513 


IV 

IV 

XI 

Xll 

IV 

XI 

XXV 

VIII 

III 

IX 

III 

VII 

VIlI 

IV 

X 


Section 


55 

94 

6 

5 

31 

1 


III 

IX 

XII 

VII 

XI 

IV 

XIII 

XII 


South  Dal<ota. 

Tennessee 

Texas 

Utah 

Virginia 

■Wa?»liington  .. 
Wyoming 


1864K     1 

VIII 

J  8771 5 

Pt.  2 

19021 « 

Pt.  2 

18751' 

par.  I 

187418 

VIII 

1894 

VIII 

1868i» 

VII 

187ti'»" 

VII 

1889 

XII 

1851 

VIII 

1907 

X 

1857 

XI 

1857^^1 

XI 

1873 

IX 

1889 

XIII 

1870" 

II 

1876 

III 

1895 

VI 

1902 

XIII 

1889 

VIII 

1889 

X 

8 
7 
10 
4 
6 
4 

r  &  8 

6 
179 
56 
58 
54 
15 
14 
183 
14 
47 

1 

2 

10 

5 

5 
19 
11 
10 

7 

7 
185 

e 

17 

9 

7 

7 

1 

29 

52 

31 

185 

7 

5 


Not  Become  Stockholders. 


Const. 


1875 
1901 


71 


1874 

1879 

1876 

187 

1897 

18753 

1^85 

18684 

1877* 

1S89 

1870 

1851« 

1890' 

1879 

1898 

1J*67 

1879* 

18681° 

1S90 

186511 

1875 

1889»' 

187513 

186414 

18771* 

19021 « 

1H751' 

18741 « 

1894 

18681* 

18762« 

ls89 

1851 

1907 

18.57 

1857" 

1873 

1889 

1870" 

1876 

1895 

1W2 

1889 

1889 


Article 


IV 
IV 


XII 

IV 

XI 

XXV 

VIII 

III 

IX 

III 

VII 

XII 

IV 

X 


III 

IX 
XII 
VII 

XI 

IV 
XIII 

XI 

VIII 

Pt.  2 

Pt.  2 

I 

VIII 

VIII 

VII 

VII 

XII 

VIII 

X 

XI 

XI 

IX 

XIII 

II 
III 

VI 
XIII 
VIII 
XVI 


Section 


55 

94 


5 

31 

2 


8 


8 

7 
10 

4 

6 

4 
7  & 

6 
179 
56 
58 
54 
15 
14 
183 
14 
47 

1 
Munlc 
Corp.  1 
10 

5 

5 
par.  19 
11 
10 

7 

7 
1S5 

6 
17 

9 

7 

7 

1 

29 

52 

31 

185 

7 

6 


Applies  to  counties  only. 

Amendment. 

Amendment. 

May  by  majority  vote  of  qualified  electors. 

Except  for  charitable  aid. 

Applies  to  counties  only:  not  absolute. 

Except  to  construct  or  maintain  bridges. 

»  Not  absolute.'    Amendment.    Mayto5%assd.   value.    Was  10%,  1872, 

» "Unless  approved  by  two  thirds  vote  at  general  election. 

"Unlessby  two  thirds  vote  at  election.  .^      .  .    v.  *•  it      w 

""Except  to  such  ownership  as  may  accrue  to  the  state  by  operation  or  provision  by 

law  " 
I'Not  aiisolute.    Maximum  for  counties  and  all  subdivisions  equals  15%. 

^*Not  absolute. 

^*Amendment.  Applies  to  towns  only. 

1 'Amendment. 

"Amendment, 

^^Amendment.  .„   ^     ,     . 

I'Mayby  majority  vote  of  qualified  electors, 

•lAmendment.  ,.    .     .^        ^    ,  4.-  m  iooa 

""Unless  by  three  quarter  vote.    Majority  vote  in  some  counties  until  1880. 


1 


f 

I 


#1 


APPENDIX  IV 

TABLE   8H0WING  RA.TIO    OF  TOTAL  AS9E3SED  TO  TOTAL    TRUE  VALUE 
OF  PROPERTY,  FOR  WISCONSIN,  BY  COUNTIES  AND  BY  CITIES. 

(Average  for  five  years.) 


County 


Burnett 

Calumet.... 
Chippewa... 


Clark. 


Columbia. 

Crawford , 
Dane 


Dodge , 


Door 

Douglas 

Dunn 

Fond  du  Lac. 


Green 
Iowa  . 


Green  Lake. . , 

Iron , 

Jackson 

Jefferson 


Adams 

65.23 
d6.47 

55.04 

60.41 

Ashland 

Barron 

Bayfield 

Brown 

Buffalo 

51.21 

1902- 
1906 


.    45.11 
63.73 


Eau  Claire 

Florence 

Forest 

Grant 


Juneau 

Kenosha 

Kewaunee 

La  Crosse '  79.30 


75.50 


60.18 
64.80 


49.59 


71.68 


65.91 


48.10 
66.64 


56.53 
59.48 
59,92 


66.94 


1903- 
1907 


63.46 
62.39 
51.61 


54.98 
57.60 

53.21 


44.22 
7:^.60 
59.26 

74.68 


73.43 

54.38 
58.76 

63.26 


58.86 
73.13 


LaFayette. 


Langlade. 
Lincoln.. . 


Manitowoc. 
Marathon .. 


63.42 

67.40 
57.94 

65.60 
47.73 


1904- 
1908 


60.17 
59.64 
49.55 


54. 91 
55.94 

57.13 


47.11 

48.09 
45.32 
70.45 


62.81 
55.42 
45.34 
66.81 


55.14 

55.76 

58.14 
41.81 
64.51 
63.26 


55.18 
70.32 
52.94 
77.04 

60.15 

63.62 
54.77 

64.27 
44.90 


1905- 
1909 


58.48; 
59.6V» 
48.48' 


54.29! 
54.92 


61.83 


43.38   43.59 


7o.50 
56.98 

72.46 


72.40 

52.46 
5S.08 

62.08 


45.43 
49.13 
45.30 
70.13 


60.52 
53.97 
42.91 


75.24 
55.18 

70.40 


70.W 

51.34 
57.20 

:59.30 


44.80 
54.29 
45.04 
69.87 


59.23 
50.16 
43.12 


66.00   65.14 


54.18 

53.23 

58.30 
39.29 


52.84 
51.00 

54.63 

38.29 


62.23   60.49 
61.43   60.02 


54.45 
68.64 
50.83 
75.75 

57.36 

61.43 
53.68 

63.81 
44.47 


53.11 
65.95 
50.29 
75.10 

54.77 

60.79 
52.38 

63.12 
44.85 


City 


Barron 

Rice  Lake  . . . 
Cumberland,. 

Chelek 

Wa-hburn — 

DePere 

Green  Bay... 

Alma 

Buffalo 

Fountain 

iUondovi 


1902- 
1906 


65.44 
68.23 

GS.3H 

49.08 

!U1.55 


Chilton 

Chippewa  Falls... 

Stanley 

Colby  

Greenwood 

Neillsville 

Columbus 

Pen  age 

Prairie  du  Chien 

Madison , 

Stougliton 

Beaver  Dam 

Waupuri , 

Ma.yville  

Horicon 

Juneau 

Watertown 

Sturgeon  Bay 

Superior  (3) 

Menrmonee 

Fond  du  Lac 

ilipon 

Waupun 


72.42 
49.51 
70.44 
57.03 


1903- 
1907 


1904- 
1908 


71.04 
01.48 


82.78 
82.93 


64. 
61. 


70 

82 


46.31 
78.  C.T 
4S.7^ 
67.52 
63.39 
58.43 

'53!68 


75.81 
63.22 
67.86 


Crandon  

Platte  ville 

Lancaster 

Boscobel 

Monroe 

Brodhead 

Dodge  ville 

Mineral  Point. 


Black  River  Falls 

Ft.  Atkinson 

Jefferson 

Lake  Mills 

Watertown 


Kenosha 


LaCrosse... 
Onalaska. .. 
Darlington. 
Shullsburg. 

Antigo 

Merrill 

Tomahawk 


Colby... 
Wausau 


64.46 
82.26 

48'.  55 
70.60 
62.08 
69.15 


61.61 
62.23 
67.68 

47.88 
90.54 
^9.77 
00.51 
70.14 
51.32 
04.18 
59.90 

7.i.07 
09.46 
58.47 
61.44 
H0.24 
76.54 
82.40 
81.92 
05.02 
0:^.58 
59.26 
45.61 
74.44 
47.53 
66.02 
6;i.38 
5-1.69 
58.95 
55.82 
56.67 
72.41 
G^M 
07.46 


1909 


65.22 
78.23 
6;).  01 
49.54 
69.46 
54.65 
03.33 


62.04 
00  93 
69.54 
47.09 
93.59 
57.45 
53.34 
70.04 
54.29 
61.90 
59.32 

75.36 

66.06 

50.01 

e3.Si> 

88.90 

70. 6f? 

82.99 

80.88 

63.53 

03.74 

56.60 

45.73 

73.07 

45.90 

66.20 

03.31 

53.11 

55.95 

58.31 

57.87 

73.31 

65.40 

67.35 


83.3CI!  82.78 
63.71 
80.66 
50.51 
67.41 


76.30 

85.41 
70.96 
76.24 
86.52 
71.33 
64.85 
66.48 

62.39 
45.59 


73.84 


83. 
71. 
75. 
87. 
67. 
64. 
61. 


35 
10 
86 
80 
96 
65 
55 


75.55 
43.37 


64.44 
78.18 
71.48 
51.44 
09.64 
53.32 
59.01 


77.97 
59.40 

79.58 
51.38 
62.10 

72.67 

81.48 
69.04 
75.75 
85.15 
67.68 
64.93 
59.88 

82.28 
42.28 


61.22 
05.04 
71.58 
45.79 
97.72 
57.50 
57.00 
80.53 
53.04 
63.42 
62.30 

77.91 

03.92 

54.2:i 

65.68 

88.98 

77.05 

82.25 

78.86 

62.90 

64.55 

55.05 

44.72 

68.21 

44.02 

63.16 

59.22 

50.39 

57.08 

58,52 

57.60 

72.82 

65.37 

67.48 


52.13 
63.97 
75.54 
73.33 

51. eo 

69.55 
52.03 
56.34 


77.96 
56.36 
77.03 
51.07 
60.69 

69.80 

79.44 
69.20 
73.23 
86.08 
69.53 
67.07 
57.41 

73.93 
41.83 


I 


APPENDIX  IV— (Continued. 


County 


Marinette  . 
Mamuette . 
Milwaukee 


Monroe 


Oconto 

Oneida 

Outagamie. 


Ozaukee 


Pepin  . 
Pierce 


Pollc 

Portage , 
Price .... 
Racine . . 


Richland . 
Rock 


Rusk 

St.  Croix 


Sauk 


Sawyer 

Shawano.. .. 
Sheboygan .. 


Taylor 

Trempealeau 

Vernon 

V  JLlcLZ)  ••  ••••  •••■  ■•■! 

Walworth 


Washburn  . . 
Washington 


Waukesha. 
Waupaca  . 


Waushara  . 
Winnebago 


Wood 


1902- 
1906 


52.87 
53.22 
51.21 


69.78 

55.56 

50.89 
69.26 


72.28 
56.73 


1903- 
1907 


46.45 
63.52 
65.31 
62.92 

54.40 
64.36 


58.40 


52.94 


52.30 


60.73 
31.12 
64.71 


51.41 

•  •  •  ■  •  • 

50.76 
63.84 

63.10 


57.28 


50.47 
53.01 
51.15 


66.92 

53.06 
48.14 
68.72 


75.12 

53.86 
54.85 

45.73 
60.09 
60.24 
00.30 


1904- 
1908 


1905- 
1909 


48.56 
53.07 
50.02 


64.86 

50.79 
46.87 
07.93 


74.36 

52.90 
53.40 

45.93 
50.25 
57.35 
59.22 


51.45   49. 4t 
63.62   02.85 


51.65 
56.50 


51.46 
50.63 
73.05 


51.20 
53.20 
58.85 
36.0f» 
62.29 


50.01 
74.33 

50.28 


48.81 
55.70 


48.25 
53.07 

49.58 


62.50 

49.40 
46.14 
67.98 


72.94 

50.66 
52.42 

46.74 
53.90 
54.38 
58.30! 
I 
48.36 
02.50 


47.89' 
54.89 


55.9: 


53.79 


48.97'  46.95 
49.51  48.29 
70.10   68.48 


50.08 
55.59 
56.  B7 
30.47 
01.40 


47.76 
73.50 

51.15 


63.12   62.78 


60.64 
71.34 


56.15 


57.75 
70.12 


56.?? 


49.49 
55.23 
55.18 
36.37 
59.18 


45.79 
71.47 

50.29 

62.27 


50.45 
69.03 


55.06 


City 


No  cities. 

South  Milwaukee 

Wauwatosa 

M' est  A  His 

Milwaulcee 

r*l)^T*L'Si  ••..•••••••-. 

Tomah , 


Appleton 

Kaukauna 

New  London 

t?e.vmour  City  . . 

Cedarburg  

Pt.  Washington. 


1902- 
1906 


36.08 
53.78 
30.74 
50.64 

84.29 
70.81 


66.24 
88.34 
64.62 
53.i'4 
66.54 
81.56 


1903- 
1907 


Prescott 

River  Falls 

No  cities. 
Stevens  Point... 

Phillips 

Burlington 

Racine 

Richland  Center 

Beloit 

Edgerton 

Evansville 

Janes  ville 

Laoysmith 

Glen  wood 

Hudson 

Ne  w  Richmond . . . 
River    Falls    (1st 

ward) 

Baraboo 

Reedsburg  

No  cities. 

Shawano 

Elkhart  Lake 

Pl.vmouth 

Slieboygan 

I^Iedford 

No  cities. 

Viroqua 

No  cities. 

Delavan 

Elkhoru 

Lake  Geneva 

\Vhliewater 

No  cities. 

Rarlford 

West  Bend 

0<  onomowoc 

Waukesha 

Clinton  ville  City. 

New  London 

Waupaca 

Berlin 

Mena.sha 

Neenah 

Oshkosh  

Grand  Rapids... 

Marshfleld 

Pittsville 


74.47 
93.30 
55.  £4 
63.68 
71. 9S 
59.14 
49.72 
76.83 
6*<.87 


104.13 
74.90 
81.20 

61.. 3C 


65.69 

67.94 

58.21 
64.10 
64.67 
70.81 


53.32 
53.00 
62.40 
73.06 
8i.40 


60.89 
73.96 
70.58 


37.57 
55.45 
30.27 
50.48 
84.10 
68.06 


66.  Vo 
83.84 
65.47 
54.20 
(Hi. 14 
79.0*^ 

48.86 
61.25 

71.92 
86.80 
50.12 
01.21 
70.54 
59.42 
52.07 
76.13 
07.98 
52.57 
89.08 
72.03 
72.53 

57.62 


54.85 

T4.40 
72.00 
76.48 
67.17 

65.00 

56.07 
61.33 
61.52 
70.66 

65.64 
73.13 
51. 6S 
5^.63 
65.07 
70.45 
79.88 
65.12 
63.19 
74.43 
64.50 
67.09 
71.90 
74.68 


1904- 

1908 


1905- 
1909 


41.28 
52.76 
32.56 
49.17 
85.00 
65.42 


66.96 
79.10 
65.98 
55.79 
66.60 
81.00 

51.34 
63.61 

73.24 
79.98 
50.37 
59.94 
70.46 
5«.85 
58.30 
77.15 
06.77 
50.87 
80.67 
66.80 
70.98 

55.35 
75.52 
49.20 

55.69 
68.66 
69.08 
72.81 
64.60 

62.10 

53.84 
56.97 
61.81 
68.58 

59.85 
71.70 
53.80 
54.37 
71.09 
71.73 
81.30 
46.43 
59.75 
68.91 
63.29 
69.70 
73.88 
71.59 


49.23 
52.14 
34.76 
49.00 
83.90 
04.48 


'W 


SECRIST-RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


127 


BIBLIOGRAPHY 

Abbott,  Howard  S.,  A  Treatise  on  the  Law  of  Municipal  Corpo^ 

rations,  etc.,  (St.  Paul,  1906)  3  vols. 
Adams,  H.  C,  Public  Debts,  (New  York,  1892).  .  ^    ^  ^. 

Adams,  H.  C,  The  State  in  its  Relation  to  Industrial  Action, 

Allison,  E.  P.  &  Penrose,  Boies,  A  Historij  of  Municipal  Develop- 

ment,  (Philadelphia,  1888). 
Bidden,  Geo.,  Loans  of  Local  Authorities,  (London,  191U). 
Bishop,' A.  L.,  The  State  Works  of  Pennsylvania,  (1907). 
Bourne,  E.  G.,  Historij  of  the  Surplus  Revenue  of  1837,  (New 

York,  1885).  *  ^    ,    iqiax 

Bryce,  James,  The  American  Commonwealth,  (New  York,  lyiu;, 

new  and  revised  edition.  ^ 

Callendar,  G.  S.,  ''State  Enterprise  and  Corporations,''  Quar- 
terly Journal  of  Economics,  vol.  xvii. 

Chamberlain,  Lawrence,   The  Principles  of  Bond  Investment, 
(New  York,  1912). 

Chandler,  Alfred  D.,  The  Metropolitan  Debts  of  Boston  and  Vi- 
cinity,  (Brookline,  Mass.,  1905). 

Conway,  Thomas  Jr.,  and  Atwood,  Albert  N.,  Investments  and 
/Speculation,  (New  York,  1912). 

Cooley,  Thomas  M.,  A  Treatise  on  the  Constitutional  Limitations, 
(Boston,  1883),  5th  ed. 

Crozier,  J.  B.,  The  First  Principles  of  Investment,   (London, 

19110-  ^      .       .., 

Curtis   B.  R.,  (ed.)  Memoir  of  Benjamin  Bobbins  Curtis  with 
some  of  his  Professional  and  Miscellaneous  Writings,  (Bos- 
ton, 1879),  2  vols. 
Deane,  Maurice  B.,  Municipal  Bonds  Held  Void  (New  York, 

1911). 
Deming,  Horace,  The  Government  of  American  Cities,    (New 

York   1909 ) . 
Dixon,  Frank  H.,  State  Railroad  Control,  etc.,  (New  York,  1896). 
Fisher,  Irving,  Elementary  Principles  of  Economics,  (New  York, 

1911). 

[127] 


128 


BULLETIN   OF  THE  UNIVERSITY  OF   WISCONSIN 


SBCRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


129 


i    H. 


Garland,  James  S.,  New  England  Town  Laws,  (Boston,  1906). 
Gray,  James  M.,  Limitations  of  the  Taxing  Power,   etc.,   (San 
Francisco,  1906). 

Johnson,  W.  C,  Belief  of  the  States,  House  Doc.  No.  296,  27th. 
Cong.  3rd  Sess. 

Hammond,  J.  D.,  History  of  Political  Parties  in  the  State  of  New 
York,  (Syracuse,  1852),  3  vols. 

Hazard,  Register  of  Pennsylvania. 

Lanman,  J.  H.,  History  of  Michigan,  (New  York,  1839). 

Lincoln,  C.  Z.,  The  Constitutional  History  of  New  York,  (Roches- 
ter, 1906),  5  vols. 

Lincoln,  C.  Z.,  State  of  New  York,  Messages  from  the  Governors, 
etc.,  (Albany,  1907),  10  vols. 

Martin,  W.  E.,  '^Internal  Improvements  in  Alabama,''  Johns 
Hopkins  University  Studies,  vol.  XX. 

McQuillin,   Eugene,  A  Treatise  on  the  Law  of  Municipal  Corpo- 
rations,  (Chicago,  1911). 

Nelson,  S.  A.,  Bond  Buyers'  Dictionary,  (New  York,  1907). 

Niles,  H.,  Register,  etc. 

Perry,  J.  Rby,  ''Public  Debts  in  Canada/'  University  of  Toronto 

Studies,  vol.  i. 
Pond,  0.  L.,  Municipal  Control  of  Public  Utilities. 
Purdy,  Lawson,  Sec>.,  The  City  Debt  in  Relation  to  the  Consti- 

tutional  Limit  of  Indebtedness,  (New  York,  1908). 
Shambaugh,  B.  F.,  The    Messages    and   Proclamations    of    the 

Governors  of  Iowa,  (Iowa  City,  1903). 
Simonton,  T.  C,  A  Treatise  of  the  Law  of  Municipal  Bonds,  etc , 

(New  York,  1896). 

State  and  Local  Taxation,  Second  International  Congress,  Colum- 
bus, 1908. 

Thorpe,  Francis  N.,  The  Federal  and  State  Constitutions,  Colon- 
ial  Charters  and  other  Organic   Laws,   etc.,    (Washington 
1909),  7  vols.  .  ' 

Trotter,  Alex,  Observations  on  the    Financial   Position   of   the 
States  of  North  America,  (London,  1839). 

Wilcox,  D.  F.,  The  American  City,  (New  York,  1904). 

Wilcox,  D.  F.,  Schriften  des  Vereins  fiir  Socialpolitik,  vol.  123. 

[128] 


Constitutional  Proceedings 

Iowa :  The  Debates  of  the  Constitutional  Convention  of  the  State 
of  Iowa  (Davenport,  1857),  2  vols. 

Kentucky:  Reports  of  the  Debates  and  Proceedings  of  the  Con- 
vention of  Kentucky,  (Frankfort,  1849). 

Ohio:  Proceedings  of  the  Ohio  Constitutional  Convention,  (Co- 
lumbus, 1873). 

Pennsylvania:  Constitutional  Debates,  (Harrisburg,  1838). 

Utah:  Proceedings  of  the  Constitutional  Convention,  (Salt  Lake, 
1895). 


Documents 

Alabama:  Governor's  Messages,  1857,  1871. 

Canada:  Report  of  Ontario  Railway  &  Municipal  Board, 
(Toronto,  1908). 

England:  Parliamentary  Report  June  16,  1909  (cd.  193),  "Ap- 
plication of  Sinking  Funds  in  Exercise  of  Borrowing  Pow- 


ers. 


jt 


England :  Parliamentary  Report  of  the  Select  Committee  on  the 
*' Repayment  of  Loans  by  Local  Authorities."     (1902). 

Illinois :  Legislative  Reports,  1839-40. 

Michigan :  House  Documents,  1842,  1845,  1846. 

New  York :  Assembly  Documents,  1838,  1845,  1846. 

New  York :  Senate  Documents,  1839. 

New  York:  Comptroller's  Report,  1837,  1843,  etc. 

New  York :  Advisory  Commission  on  Taxation  and  Finance,  1908. 

Ohio :  Senate  Reports,  1831,  1834,  etc. 

Pennsylvania:  Governor's  Messages. 

Rhode  Island:  Report  on  Taxation  Laws,  (Providence,  1910). 

Statistics  of  Municipal  Finances,  (Boston,  1907). 

Statistics  of  Cities  with  Population  over  30,000  (Washington, 
1907,  1908). 

Valuation,  Taxation  and  Indebtedness,  (Washington,  1880). 

Wealth,  Debt  and  Taxation,  (Washington,  1907). 


[129] 


I 


130  BULLETIN  OF  THE  UNIVERSITY  OF  WISCONSIN 


Periodicals 

The  Accountant,  (London). 

American  Journal  of  Social  Science,  vol.  ix,  1877. 

American  Quarterly  Review. 

American  Law  Register. 

Annals  of  the  American  Academy,  etc.,  (Philadelphia). 

Bankers^  Law  Journal. 

Bankers'  Magazine,  (London). 

Bankers'  Magazine,  (New  York). 

Bradstreets,  (New  York). 

Commercial  and  Financial  Chronicle,  (New  York). 

The  Democratic  Review. 

The  Fortnightly  Review. 

Hunt's  Merchant  Magazine. 

The  International  Review. 

The  Independent,  (New  York). 

Iowa  State  Bar  Association,  Reports  of,  1903. 

Moody's  Magazine. 

New  Jersey  Law  Journal,  (1879),  vol.  ii. 

The  North  American  Review. 

Science. 


SECRIST— RESTRICTIONS  ON  PUBLIC  INDEBTEDNESS 


131 


State  of  Iowa  ex  rel.  v.  The  City  of  Wapello,  13  Iowa,  388  (1862). 

State  V.  Barnes,  97  Pacific  Rep.  977  (1908). 

State  V.  Miller,  96  Pacific  Rep.  747  (1908). 

Stewart  v.  Supervisors  of  Polk  Co.,  30  Iowa,  9  (1870). 

Tood  V.  City  of  Laurens,  26  S.  E.  Rep.  682  (1897). 

Valley  v.  Board  of  Park  Commissioners,  111  N.  W.  615  (N. 

Dak.)  1907. 
Valley  City  Salt  Co.  v.  Brown,  7  W.  Va.,  191. 
Wilcoxen  v.  City  of  Bluffton,  154  N.  E.  110  (Ind). 
Whiting  V.  Sheboygan  Ry.  Co.,  25  Wis.  167. 
Wilson  V.  The  Board  of  Education,  etc.,  81  N.  W.  952. 
Wilson  V.  The  Board  of  Trustees,  27  N.  E.  Rep.  203. 


Chief  Cases  Cited. 

Barnes  v.  Hill,  99  Pac.  927,  (1909). 

Board  of  Education  v.  Betting,  9  New  Mexico,  588. 

City  of  Williamsport  v.  Commonwealth,  84  Pa.  487. 

Dubuque  County  v.  Dubuque  Railroad  Co.,  4  Greene,  1. 

Fenton  v.  Blair,  11  Utah,  78. 

Hanson  v.  Vernon,  27  Iowa,  28  (1869). 

Kennebec  Water  District  v.  City  of  Waterville,  52  Atl.  Rep.  774 

(Me.)  1902. 
Law  et  al.  v.  People  ex  rel.,  87  III.  385. 
Lobdell  V.  City  of  Chicago,  81  N.  E.  354,  227  III.  281. 
National  Life  Insurance  Co.  v.  Meade,  133  S.  Dak.  37. 
People  V.  Salem.  20  Mich.  452  (1870). 
Sharpless  v.  Mayor  of  Philadelphia,  21  Pa.  St.  147  (1853). 

[130] 


[131] 


« 


V'^ 


Si^ 


\ 


IV 


a%^ 


'■•• 


/\/ti'^5^^ 


m 


OCT  t  3  I92i 


COLUMBIA  UNIVERSITY  LIBRARIES 


0041422040 


l' 


;^1 


q 


END  OF 

TITLE 


